Well positioned: Increasing awareness of financial services and formalising regulations

Even in spite of continued turbulence in global markets, Ghana’s banking sector has been consistently profitable over the past year and continues to show steady growth across all areas. High-yield Treasury bills have enabled banks to make good returns on investments, although high commercial interest rates on loans remain a sticking point for many potential clients. At the same time, an emerging salaried middle class, combined with broader credit transparency, is enabling the retail sector to boost lending activity, although with a growing number of projects seeking large-scale finance, there is a need for an increased volume of long-term deposits. Some credit tightening has been experienced in the first part of 2013 and the rate of economic growth has cooled to some extent, though it is still among the most robust on the continent. However, as is the case with many emerging markets in Africa, access to finance remains a priority: many banking institutions remain wary of extending credit to small and medium-sized enterprises (SMEs), and 70% of the population remains unbanked.

William Adjovu, managing director of Midland Savings and Loans, told OBG, “In many rural areas people feel intimidated about walking into a bank; they assume that having a bank account is a privilege of the wealthy. The real challenge for the Ghanaian banking sector is to overcome that prejudice through education.”

Ghana’s financial sector includes 26 universal banks and 52 non-bank financial institutions (NBFIs). There are 136 licensed rural and community banks (RCBs), three licensed credit reference bureaux and 228 licensed microfinance institutions, which are all regulated by the Bank of Ghana (BoG). The sector has been fairly dynamic recently. In the past 12 months a new universal bank, The Royal Bank, has been created and two mergers have taken place. Ecobank merged with The Trust Bank and Access Bank with Intercontinental Bank Ghana.

BANKERS: Of the 26 universal banks, 15 are foreignowned and 11 are Ghanaian-owned, although more than half of the sector’s assets are held by six institutions (see analysis). The state holds shares in several of the country’s financial institutions, either directly through the government or via the national pension fund, the Social Security and National Insurance Trust (SSNIT). The state holds more than 51% of shares in Ghana Commercial Bank (GCB), one of the country’s largest by assets, with the public’s holdings divided between a direct holding of 21.3% and SSNIT stake’s of 29.81%.

The National Investment Bank (NIB) is 100% stateowned, as is the Agricultural Development Bank, whose shares are divided between the government, with 52% ownership, and the Financial Investment Trust, which owns the remaining 48% on behalf of the BoG.

The SSNIT itself had additional smaller equity holdings in nine banking and insurance firms in December 2011, including a 34.4% stake in CAL Bank, 24.36% of shares at HFC Bank and 22.14% of shares in Société Générale-Social Security Bank, which has recently been renamed Société Générale Ghana. SSNIT had also previously owned 61% of shares in The Trust Bank, although most of this was purchased by Ecobank in 2012, leaving SSNIT with a stake of 16% in the merged bank.

SSNIT also owns 68.75% of Merchant Bank. A planned take-over of Merchant Bank by FirstRand Bank of South Africa was called off in July 2013, when FirstRand and SSNIT were unable to reach agreement on terms, prompting Ghana’s central bank to issue a statement saying it was providing liquidity support for Merchant Bank. The bank reported a loss of GHS23.9m ($12.29m) in 2011, in its last published financial statement.

NEW ADDITION: The newest universal bank in Ghana, The Royal Bank, was granted its licence in November 2012 and started trading the following month with GHS100m ($51.41m) in capital. It expanded from two branches to five over its first six months, with plans to open another eight branches across the country by the end of 2013 and 25 within three years. The new arrival represents something of a change in direction for the sector, given the push by the BoG to encourage consolidation amongst financial providers in recent years. Indeed, with more than half of the sector’s activity concentrated among six banks, The Royal Bank has entered an already-crowded field of financial institutions. However, the country’s retail segment remains largely underdeveloped, as indicated by the low proportion of banked individuals, which has allowed the new entry to clear a profit every month since it began lending. “As society becomes more sophisticated and middle-class incomes grow, it becomes more attractive to business,” said Robert Kow Bentil, CEO and managing director of The Royal Bank. “That is what we have seen in Ghana with salary products aimed at these people.”

REPORTING UPDATES: Reducing the state’s direct role in the banking sector has been something of a theme in recent years. The state has already reduced its holdings in The Trust Bank, following its merger with Ecobank in 2012, and the proposed take-over of Merchant Bank by FirstRand, although it has been since called off, would have moved that lender out of the state-owned sphere. Ultimately, public sector ownership in the banking sector is far lower than a number of other African markets, but donor institutions have been keen to encourage further progress.

The IMF and the World Bank published a “Stability Assessment Update” on Ghana’s financial system in 2011 and highlighted “vulnerabilities” caused in part by state involvement in the banking sector. “The performance of these state-owned banks has been poor due to lending practices that focus on developmental objectives at the expense of prudential considerations,” according to the report. The report added that losses at state banks left the government with “contingent liabilities”, while fiscal deficits meant the government had fallen behind on payments to contractors, compounding the issue of non-performing loans (NPLs).

INDICATORS: Ghana has a well developed network of financial services, ranging from large multinational banks to small-scale susu lenders, but encouraging growth in the formal sector has been a challenge. A World Bank report in 2012 found that 29% of Ghanaians over the age of 15 had accounts with formal financial institutions. However, 29% of Ghanaians surveyed have also borrowed from family and friends, suggesting a continued reliance on informal credit. The banking and insurance sector comprised GHS3.38bn ($1.74bn) – 5% of GDP – in 2012, up from GHS2.46bn ($1.26bn) and 4.4% of GDP in 2011. By comparison, in 2006 it contributed just 2.7% of GDP.

While the weight of the sector is increasing, banks’ balance sheets remain modest when compared with the needs of the country’s larger infrastructure projects. BoG figures show the total assets of universal banks, NBFIs and rural banks increased by 23.6% yearon-year (y-o-y), to reach some GHS31.4bn ($16.1bn) in December 2012. Deposits were likewise up by 25.1% over the year, to GHS22.15bn ($11.4bn). The compound annual growth rate (CAGR) for deposits from December 2007 to December 2010 was 24%.

However, there has been a significant shift in loan activity, which had a CAGR of 18% from December 2007 to December 2010, compared to an increase of almost 42% for the 12 months from December 2011. According to PwC, this rise in loan activity may be attributed to a number of factors, including greater confidence in the economy, improvements in the banks’ own credit appraisal and monitoring systems, and pressure to invest additional funds resulting from the central bank’s drive to increase minimum capitalisation requirements. In 2012 loans and advances jumped by 41.8%, to GHS13.78bn ($7.08bn), and investments went up by 25.5%, to GHS8.24bn ($4.23bn), according to the BoG. Total earning assets constituted 70.1% of total assets, compared to 69.2% the year before, with activity appearing to have been driven largely by improved performance among universal banks.

LARGER LOANS: A 2013 survey by consulting firm PwC of the 26 universal banks also points to an expansion in loan activity among those institutions. Net industry loans and advances as a percentage of banks’ total operating assets trended up to 47% of the total, a figure last seen in 2009. In 2010 it had been down to 43% and it fell again in 2011, to 41%. The PwC report states that in 2012 net industry loans and advances grew by GHS3.9bn ($2bn), or 44%, compared to 2011.

Even though interest rates on Treasury bills increased from 10.3% in 2011 to 23% at the end of 2012, the relative proportion of bank investments in cash and liquid assets as a percentage of industry operating assets declined as the banks grew their loan portfolios in 2012. This is likely due to an increase in demand for credit and the banks’ views on short- to medium-term prospects, as well as rising confidence in their own credit appraisal processes.

Universal banks’ stated capital grew from GHS1.2bn ($617m) in 2009 to GHS2.1bn ($1.08bn) in 2012, an increase of 75%. This is in part due to the fact that during 2012 all 26 universal banks were required to meet a new minimum paid-up capital level of GHS60m ($30.8m). Industry deposits, meanwhile, rose from GHS9.8bn ($5.04bn) in 2009 to GHS20.7bn ($10.6bn), an increase of 111%. The net worth of the 26 universal banks grew by 32.7% to GHS4.02bn ($2.06bn) in 2012, according to the central bank. However, the most recent, April 2013 report from the BoG’s Monetary Net banking loans & advances, 2008-12 Policy Committee (MPC) reports a net tightening of credit stance to enterprises. The MPC’s assessment is that this reflects banks’ expectations of the general economic environment. The report said banks have also increased margins on average loans and riskier loans as well as their collateral requirements. Indeed, interest margin to gross income grew from 38.9% in April 2009 to 47.9% in April 2012 and 51.2% in April 2013.

The last two financial stability reports issued by the BoG’s MPC show an increase in securities or long-term investments and a drop in investment in Treasury bills. Banks’ investments in securities as a share of total investment grew from 40.4% in December 2011 to 44.7% in December 2012 and 49.2% in April 2013. Consequently, and in contrast, the proportion of total investments in short-term Treasury bills declined from 57.4% in December 2011 to 53.3% in December 2012 and 48.9% in April 2013. The balance sheets of NBFIs have shown improvement, expanding by 49.7% in 2012 to GHS2.68bn ($1.38bn), according to the central bank.

The growth in assets is reflected mainly in loans and advances (49.4%), investments (128.2%) and other assets (59.2%). Deposits and borrowing, meanwhile, increased by 53.3% and 49.2%, respectively, while total assets of NBFIs constituted 8.5% of total assets of banks and NBFIs, up from 7.1% in 2011. “NBFIs are the driving force behind the growth of the SME sector, since many smaller companies are still excluded from accessing finance through normal banking channels due to higher risk and a lack of transparency,” Kojo Ohene-Kyei, the CEO of IFS Financial Services, told OBG.

BoG reports state that the private sector received some 87.9% of banks’ total credit at the end of April 2013, compared to 91% at the end of April 2012.

NPLS: The NPL ratio improved from 14.1% in 2011 to 13.2% in 2012, which may reflect a shift away from riskier lending by some institutions, as well as enhanced transparency thanks to increased credit bureau coverage. However, the risk profile for Ghanaian borrowers remains elevated, with an NPL rate higher than that of Nigeria. The private sector accounted for 91.9% of NPLs at the end of April 2013, down slightly on the 92.3% recorded at the end of April 2012. Of those NPLs, 84.2% Minimum capital requirements, 2009 & 2012 were private businesses and 78.8% were private businesses owned by Ghanaians.

As part of a push to reduce the NPL ratio more aggressively, Ghana passed the Credit Reporting Act in 2007 and now has three licensed credit bureaux – XDS Data, Dun and Bradstreet, and Hudson Price Data. The first of the agencies, XDS Data, began operations in 2010 and the others were licensed in quick succession in 2011 and 2012. By the end of December 2012 all of the country’s 26 universal banks and its NBFIs had signed up for credit reference services, although according to local press reports, implementation was spotty and at least nine NBFIs had yet to submit data to the bureaux.

“The credit bureau agencies will be the most significant introduction to the industry if the information is updated monthly and all institutions are mandatorily subjected to it,” said Selasie Woanyah, the managing director of Diamond Capital. Normally, universal banks and NBFIs must submit data to the all three bureaux every month, and early in 2013, the BoG instructed microfinance institutions to do the same. Still, usage is growing and the number of credit checks performed by financial institutions increased by 160% to 205,949 in 2012, according to the BoG.

“[Coverage] is difficult within the informal sector, but we are now going out there to get data on all of them,” Stephen Amoakwa, head of finance for XDS Data, told OBG. Some believe the next step will bring a more comprehensive approach to data reporting, with insurance, utilities and telecoms firms pooling their credit data with the banks.

Evans Sarpong, the managing director of Dun & Bradstreet Ghana, believes responsible borrowers will soon see the benefits of more transparent credit reporting and that a more comprehensive system will also stimulate further foreign direct investment in the country. “Ghana is a good environment to invest in, because the law is there and foreign investors should know that it works, so as a credit bureau we can take the middle ground between foreign companies and local enterprises,” Sarpong told OBG REGULATORY FRAMEWORK:Banks, NBFIs and microfinance institutions are regulated by the BoG under the Bank of Ghana Act and the Banking Act. The BoG’s Banking Supervision Department oversees the system. Banks are required to submit returns on a daily, weekly, monthly, quarterly and semi-annual basis, and each institution is subject to at least one on-site visit per year. Rural and community banks, which are subject to tighter geographic restrictions in terms of their area of activity, as well as lower capitalisation requirements, are overseen by the ARB Apex Bank, a “mini-central bank” formed by the Association of Rural Banks in 2000 to handle functions such as cheque clearing and cash movement. The ARB Apex Bank falls under the regulatory supervision of the BoG.

A similar institution has been proposed for the microfinance segment, thereby perhaps reducing the burden on the central bank, which lacks the capacity to monitor closely the large number of players. As of June 2013, the BoG had licensed a total of 228 microfinance institutions, but only about 50 of these were reporting financial results on a regular basis, according to reports from the local media.

MOBILE BANKING: Providing alternative means of access for the unbanked population is a salient trend in the financial services sector. Fewer than 30% of Ghanaians have a bank account; as mobile banking and microfinance have taken off in other African markets, providers are looking for the same in Ghana.

A KPMG survey from May 2013, which covered 25,000 customers in 14 countries, showed eight out of 10 customers never use mobile banking, while 85% conduct fund transfers through the branch and 56% check their balances at the branch. However, the success of Safaricom’s M-Pesa mobile wallet programme in Kenya, which now has roughly 17m subscribers since its launch in 2007, is prompting excitement from mobile network operators, which are launching similar programmes with the aim of taking a share of transaction services.

The National Communication Agency, which regulates the telecommunications sector, has reported that there are 25.3m mobile subscribers in Ghana – a penetration rate of over 100% – but so far attempts to engage new or existing customers with mobile financial services have been met with limited success. “The key to improve penetration rates is accessibility, and mobile phones provide the easiest access,” Alhassan Andani, managing director of Stanbic Bank, told OBG.

Mobile financial services enabling customers to make transfers, payments and deposits, and check their balances are available through four providers: Airtel, Nigerian-based e-tranzact, Tigo and MTN. Airtel is partnered with seven universal banks to provide online services, while third-party provider e-tranzact operates through 13 banks and NBFIs, and MTN works in partnership with 11 high-street banks. Tigo, meanwhile, is partnered with three banks for its Tigo Cash mobile wallet. These mobile services have seen rapid growth in the past two years, to nearly 500,000 users.

“Any banking institution that is not preparing for this will see customers moving out because today there is no customer loyalty. You have to keep that relationship going, and I believe you must do that through new channels,” said Kwadwo Aye Kusi, the managing director of ARB Apex Bank. He added that in a country like Ghana where half the population is under the age of 17, the impact of mobile data technology on banking SSNIT shares in banks, 2011 practices will be felt very quickly. “In 2013 people are becoming aware that the mobile phone is not just for communication – you can use it for all your transactions: it can be your wallet, you can pay your bills and you can use it to store your data.”

RURAL BANKING: Ghana has a surprisingly wide range of actors in its financial sphere, allowing for a variety of products perfectly tailored for a market where access to finance has room to grow. The country’s rural banks are a prime example of such an opportunity. “Rural areas related to the mining towns, for example, are one of the central points of growth for the banking sector within the region,” Patrick Anumel, CEO of First National Savings and Loans, told OBG. “They create new income earners, and attract people for services, hospitals and schools, as well as other government workers.”

Rural banks were first established in Ghana in 1976 to provide credit to small-scale farmers and rural enterprises. There are currently a total of 136 RCBs in operation, which are limited to working within a 40-km radius of their branches. RCBs have a minimum capital requirement of GHS150,000 ($77,115) and are permitted to operate in only one region. According to Aye Kusi, the RCB sector has 4.5m customers. RCBs see mobile finance products and branchless banking as the route to finding new customers among Ghana’s unbanked informal sector, as well as among the growing ranks of salaried employees. In 2012 total assets of RCBs grew by 44.5% to GHS1.52bn ($781m). According to the central bank, this growth in assets was achieved by shareholder funds and deposits, which went up by 53.3% and 45.5%, respectively. The increase in assets was reflected in loans and advances (GHS240m, $123.4m) investment (GHS47.8m, $24.6m), and cash and balances (GHS37.7m, $19.38m). Total assets of RCBs constituted 4.8% of total assets of banks and NBFIs in 2012, compared with 4.6% in 2011.

The sector is benefitting from a $15.2m assistance programme sponsored by the Danish International Development Agency, which aims to provide funding for longer-term loans, assist with mergers and improve training of bank staff. A project to network and computerise all RCBs has also been carried out with $25m in funding from the Millennium Challenge Corporation, a US aid organisation. This IT infrastructure allows RCBs to exchange data among themselves and enables them to give timely data to credit ratings agencies.

SAVINGS & LOANS: The 19 savings-and-loans institutions also play a role in improving financial access among the broader population. They are regulated by the BoG, but contract with a universal bank to make use of services, including cheque clearing and overnight lending. Since 2008 all new savings-and-loans firms have been subject to a minimum capital requirement of GHS7m ($3.6m). “We are interested in developing a savings culture,” Sarah Tsien Zetterli, managing director of ProCredit Savings and Loans, told OBG. “We see ourselves as serving rural areas, with agricultural clients making up 11% of our customers. Where we can make a difference is pushing to the rural frontiers.”

“We have customers that are tinkers or fishermen or market women” Issah Adam, general manager of First National Savings and Loan, told OBG. “Our field bankers go from tabletop to tabletop and pick up deposits from artisans and market women who do not want to leave their wares and go to the bank. In this way we are making it easier for them to access banking without leaving their stalls.” A number of savingsand-loan institutions are looking to expand into the broader banking sector, with several – including First National Savings and Loan – having applied or having announced the intention to apply for universal licences.

MICROFINANCE: Given the large informal market, the size of the unbanked population and the challenge of integrating new lower-income customers into the formal financial services arena, microfinance is taking off in Ghana, building in part on the long tradition of smallscale lending, rural banks and susu informal lending that has already helped expand basic financial services among the broader population.

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. As of June 2013, the BoG had licensed 228 microfinance companies and in August reported it was processing another 213 applications. However, the sheer volume of new microfinance firms has brought challenges of another sort, and the BoG has been forced to tighten licensing requirements and oversight following an announcement that seven microfinance firms had been closed in December 2012 for failing to meet its standards. In summer 2013, the central bank announced that the minimum capital requirement for microfinance firms – GHS100,000 ($51,410) – introduced in 2012, would be reviewed. The announcement was in response to the failures of five microfinance companies in the six preceding weeks, according to media reports. It was unclear the extent to which consumers have been hurt by the closures, although reports of depositors having difficulties withdrawing their funds have been registered with the central bank.

LEASING: As in many emerging markets, the country's leasing segment is still fairly limited, in part due to a lack of familiarity with leasing options, but certainly the potential for growth is sizable – something the country’s two firms are trying to capitalise on, particularly as the need for heavy equipment rises on the back of increased activity in the construction, mining and energy sectors. Alex Mbakogu, the general manager of Leasafric Ghana, told OBG, “The leasing market is still young, but it is growing quickly as people start realising the benefits of not needing to provide collateral, for example. Capital remains scarce and leasing offers greater flexibility to manage ones’ balance sheet.”

TRANSACTIONS: Ghana remains a society dominated by cash transactions, with a strong reliance on unofficial credit and a banking penetration rate of 29%. While this is reasonable by sub-Saharan African standards, the country still has some way to go if it hopes to match upper-middle-income nations. Economic growth, technological advances in mobile platforms and improved financial data collection look set to drive its expansion in the next few years. ATMs are increasingly common in cities and the largest banks have networks in the hundreds. Currently, linkages between electronic networks are limited, although the BoG is working toward a policy that would make it mandatory for ATMs to be linked together nationally. Since 2005, five banks have used the Ghana National Net Settlement Service, which allows customers to use machines at different banks, and during 2012 this was augmented with the introduction of gh-link, which improves interbank switching and settlement processes via ATMs and point-ofsale machines. By the end of 2012, 18 of the 26 universal banks were connected, with the remaining banks due to join by end-2013. Most ATMs are affiliated with one of the two large multinational card issuers. As in many other African markets, Visa has had a longer presence in the country, although Mastercard has in recent years been looking to aggressively expand its network.

Cheques remained the major non-cash retail payment system in Ghana. The volume of cheques cleared in 2012 increased by 3.1% to 6.7m cheques, and in value by 30.2%, to GHS69.2bn ($35.6bn). The number of transactions using the country’s national biometric card system, known as e-Zwich, was also up by 24% in value in 2012 to GHS217m ($111.6m). The e-Zwich smart card system was introduced by Ghana Interbank Payment and Settlement Systems, a subsidiary of the BoG, in 2008. It enables customers of banks and savings and loans to access banks’ services at other institutions. The number of e-Zwich cardholders increased by 17.2%, to 792,966 in 2012, according to the BoG.

HUMAN RESOURCES: Skilled staff – as is the case for many service sectors in Africa – are in limited supply, which has inflated wages and led to turnover problems. However, the educational infrastructure is expanding. Most universities in Ghana offer degrees in banking and finance, as do its polytechnics. The Chartered Institute of Banking also provides a comprehensive selection of professional development courses to its members. Still on-site training is generally essential. Zetterli said that all staff at ProCredit Savings and Loans, for example, undertake six months of training when they join.

There is also growing evidence that increasing numbers of the Ghanaian diaspora are returning home to work in the financial services sector. In 2013 the UK’s Network for Diaspora Professionals held a career fair in London, attended by businesses from Ghana in the hopes of attracting new talent back to the country.

OUTLOOK: In light of the country’s strong headline growth, as well as the solid performance of capital-intensive sectors – including construction, infrastructure, energy and manufacturing – bode well for the larger banks, although syndication for large-scale projects may still be necessary. The retail segment, which benefits from a wide variety of institutions, is equally well placed to tap into the large unbanked population. There are medium-term challenges that need to be navigated, however, including fragmentation at the lower end of the market and ensuring equal implementation of good governance and data collection measures, particularly for microfinance institutions and NBFIs.