Stronger risk management: Recent regulatory measures are enhancing stability

While a number of Africa’s banking sectors have been buffeted by ills both global and local in nature over the past few years – such as Nigeria’s, where the fallout from the sub-prime slowdown and a domestic margin lending crisis led to the last-minute nationalisation of several banks – Ghana’s banking industry has remained fairly stable and enjoy steady growth. This is due in large part to a prudent regulatory framework that limits alternative instruments and has – in recent years – strengthened its focus on risk management.

The Bank of Ghana (BoG) is responsible for the regulation and control of all sector institutions, including universal banks, non-bank financial institutions (NBFIs), microfinance firms, credit ratings agencies, and, through the ARB Apex Bank, rural and community banks. The main sector legislation includes the Bank of Ghana Act 2002, the Banking Act 2004, the Non-Bank Financial Institutions Act 2008 and the Companies Code Act 1963. Since 2007 Ghana has used a risk-based compliance system of supervision in which the BoG assesses each bank’s capital and earning quality, comparing it to risks to generate a composite risk rating.

RAISING REQUIREMENTS: As the global sub-prime crisis spread in 2007, the BoG announced plans to increase the minimum capital requirements for universal banks and NBFIs. For universal banks, they would rise from GHS7m ($3.6m) to GHS60m ($30.8m), while the minimum requirements for NBFIs went from GHS1m ($514,100) to GHS5m-8m ($2.57m-4.1m); the latter was subsequently set at GHS7m ($3.6m). By the time of the statement in October 2007 the BoG had already made a concession to the banks as it had reportedly been in favour of a GHS100m ($51.4m) minimum capital requirement, according to local press.

The first phase of the implementation gave foreignowned banks until December 2010 to achieve the new minimum, but allowed locally owned banks a further two years, providing they could achieve a minimum capitalisation of GHS25m ($12.6m) by the end of 2010. Two foreign-owned banks, Sahel-Sahara and Bank of Baroda, were given until the end of 2011 to recapitalise as they had only recently entered the market. The move to boost requirements was not, as in Europe and the US, so much in response to concerns that a handful of huge banks had become “too big to fail”, but rather that the sector included many small banks with low levels of capital. “A cluster of banks has emerged, with relatively low capital base and depth that are inadequate to support significant levels of lending, and which could be more vulnerable to minor swings in macroeconomic fundamentals,” a BoG working paper explained in 2007.

There was concern that, “a large number of banks with a small capital base within the system both dilutes the franchise value of banks and increases instability.”

MANAGING RISKS: Part of BoG’s concern was that with the then-recent discovery of oil there might also be an increase in demand for potentially more risky lending in a new, capital-intensive sector of the economy.

There were other potential benefits as well to the capital raises, beyond improving buffers. The BoG may also have been hoping that the pressure to recapitalise might lead to a new round of initial public offerings on the bourse, which hosts only a handful of banks. However, this did not happen. Of the 26 banks that were operating in 2013, only seven are listed: CAL Bank, Ecobank Ghana, GCB (formerly known as Ghana Commercial Bank), HFC Bank Ghana, Standard Chartered Bank Ghana, Société Générale Ghana and UT Bank.

Given that the country has a similar number of lenders as nearby Nigeria, which has a population nearly seven times larger, consolidation has also been often suggested, in a bid to reduce fragmentation at the lower end of the market and increase the balance sheets of the existing financial institutions, to ensure they are better able to finance the country’s spate of large capital-intensive projects. “The sector is already heavily overbanked in terms of players,” Kobby Andah, the managing director of the Bank of Africa, told OBG. “The focus should therefore be on strengthening existing banks rather than allowing more players to enter the sector.”

ACQUISITIONS: This has begun to happen over the past 12 months. Two Ghanaian banks were taken over by foreign-owned banks in 2012. Togo’s Ecobank, which had been operating in Ghana since 1990, acquired a 100% stake in The Trust Bank in January. The newly merged bank, trading under the Ecobank brand name, has since become the largest bank by asset size in the country. The merger was followed by Nigeria’s Access Bank, which has had a presence in Ghana since 2009 and acquired Intercontinental Bank in March. The combined bank now has 33 branches and 150,000 customers, along with total assets of GHS929.5m ($477.9m) at the time of the takeover.

TARGETS MET: By December 2012 all 26 banks in Ghana had complied with the GHS60m ($30.8m) minimum requirement. The BoG reported that in the three years from December 2008, bank capitalisation had nearly quadrupled, from GHS445.8m ($229.2m) to GHS1.65bn ($848.3m) by December 2011. The banks’ reserves also doubled from GHS666.9m ($342.9m) to GHS1.38bn ($709.5m) over the same period. A fortnight before the capitalisation deadline, The Royal Bank, the most recently licensed bank, began operations, although the domestically owned institution began with a capital of GHS100m ($51.41m).

In its annual report for 2012, the BoG stated that all universal banks remained solvent and that all but one met the minimum capital adequacy ratio of 10%. Indeed, the industry average in December 2012 was 18.6%, up from 17.4% in December 2011. The liquidity of universal banks was also deemed to be satisfactory, with an average domestic primary reserve ratio of 9.1% compared to the required 9%. However, there is scope for raising requirements further, particularly as the sector looks to move into line with Basel III. “Establishing an optimum liquidity requirement for the industry continues to be determined by the banks and their appetite for risky investments,” noted a report by consultancy PwC in 2013. “It is about time that the discussions on the Basel Accord are intensified and more so adopting the key principles of the Third Basel Accord.”

NON-BANK FINANCIAL INSTITUTIONS: While there has been a push to strengthen the balance sheets of existing lenders by encouraging greater consolidation amongst smaller lenders, there have been new players looking to move into the arena in recent months. In addition to the arrival of The Royal Bank, according to local press the BoG is reportedly considering universal bank licence applications from two savings-andloan companies in 2013. One of these is First National Savings and Loan, which confirmed that it had met the minimum capitalisation threshold of GHS7m ($3.5m). “The company has applied to become a universal bank and is awaiting approval,” said First National’s general manager, Issah Adam. “The due diligence is finished and the firm is awaiting a licence.”

SMALLER SEGMENTS: A number of the institutions under the BoG’s watch have a fraction of the capitalisation of the larger banks and savings-and-loans firms. The BoG’s Microfinance Framework, which was passed in 2012, has a four-tiered categorisation for three types of firms: savings-and-loan companies, deposit-taking and money-lending companies, and susu operators, mainly in rural areas. Under this new microfinance regime, the BoG requires tier-two microfinance firms to have a minimum GHS100,000 ($51,410) and tierthree firms to have just GHS60,000 ($30,846). The market for these firms is certainly growing. By mid-2013 licences had been granted to 228 such institutions.

ENFORCEMENT: There are more sordid aspects of the BoG’s work that have nonetheless helped the central bank ensure the system’s broader stability. Part of the BoG’s regulatory role, for example, is to investigate cases of unlicensed lending. In May 2013 the BoG issued a warning about three companies it said were operating what appeared to be Ponzi schemes. It warned the public not to deal with the companies and issued closing orders against the firms in question. The BoG reported that CB Net Marketing Concepts was selling top-up credit to the public under a scheme in which participants lost their deposits if they did not bring two other people on board. It also said that E-Finance and More was granting loans and taking susu, or informal lending, deposits offering interest rates of up to 100% per annum, which the BoG said was unsustainable. Diamond Investment, the third firm identified, was taking funds in the Sunyani area and offering rates of 25% a month to investors, equivalent to 300% per annum.

At the start of 2012 the BoG collaborated with the Financial Intelligence Centre, a state agency set up to monitor and counter money laundering and the financing of terrorism, to review its policies. Initially, some deficiencies were uncovered and for part of the year Ghana found itself blacklisted by the Financial Action Task Force (FATF), an intergovernmental body established in 1989 to prevent the financing of criminal activities.

Ghana was removed from the blacklist in October 2012 after improving its policies and procedures with regard to currency imports and exports, having a compliance manual for anti-money-laundering and combating the financing of terrorism (AML/CFT) for banks and NBFIs, carrying out awareness training in AML/CFT for rural and community bank managers and accountants, and holding regular meetings with the Ghana Investment Promotion Centre to discuss foreign investment incentives in the light of AML/CFT issues. During the year the bank also conducted AML/CFT risk assessments on all universal banks, as well as offering training. Two pieces of legislation passed in 2008, the Anti-Terrorism and Anti-Money-Laundering Acts, and additional anti-money-laundering regulations were introduced in 2011 to provide a legislative framework for this work.

As with many African markets, Ghana’s banking sector is by and large comparatively conservative in terms of its activities, although increasingly sophisticated retail products are being rolled out to draw in unbanked customers. The regulatory framework and oversight has strengthened the environment considerably, and should the momentum of the past 24 months – which has seen capital raises, new credit agencies and new microfinance legislation – be continued, the short- and medium-term outlooks for the sector are encouraging.