With new products and schemes in the works, regulation is changing

Regulation of banking in Ghana has evolved considerably over the years. In a little more than two decades, the banking system went from being heavily state-led and state-controlled to being more lightly and deftly supervised. Laws, rules, notices and guidelines have encouraged best practices, sound management and prudent lending, and it has been a significant and successful transition. Challenges, however, remain, and regulators are working to lessen the impact that harsh macroeconomic conditions are having on the banking sector, while improving buffers against exogenous and endogenous shocks.

Building Blocks

Since the market reforms of the 1980s and early 1990s, Ghana’s regulatory regime has been built in stages. After the country embarked on its Economic Recovery Programme in the 1980s, backed by the IMF and the World Bank, a raft of banking laws were passed and Ghanaian regulators took steps to stabilise the sector. Banks were recapitalised, a bad loan trust was established, a new banking law was passed (as was a new law for non-banks) and a series of foreign investments into the banking sector were permitted.

This first wave of legislation and regulation was followed by another in the new millennium: the Bank of Ghana Act 2002, the Banking Act 2004 and NonBank Financial Institutions Act 2008. Much of this remains on the books today.

While the Bank of Ghana has the primary responsibility for the sector, other regulators also play a role. The Securities and Exchange Commission oversees all institutions that are publicly listed. In addition, the Ministry of Finance often involves itself in matters affecting regulation – for example, requiring all banks (even non-listed ones) to follow International Financial Reporting Standards as of 2007.

Collapses

Since the reform period there have been a number of problems in the banking sector. Ghana has faced four bank collapses in the past three decades: Bank of Commerce and Credit International in 1991, Meridien BIAO in 1995, the Bank for Housing and Construction in 2000, and Co-operative Bank Ghana in 2000. Of these four collapses, two were triggered by the insolvency of foreign parents. The other two were local failures that were managed quickly and without significant problems. After the global financial crisis in 2007-08, concerns were raised about other banks, but any troubles in the sector have been relatively light.

The rural banking sector has also faced some difficulties. In the 1980s light (and sometimes misguided) regulation, poor shareholding structures, mandatory policy lending and concessional interest rates all led to widespread failures within the sector and a high level of bad loans.

The Bank of Ghana (BoG), the country’s central bank, responded to this problem by adjusting the various regulations that support rural and community banks in order to reduce risk and improve oversight and management – much as it has done with nonbank financial institutions such as type of informal, small-scale savings and loans operation) and moneylenders.

Increasing Capital

The main and most effective tool for guaranteeing the strength of the sector has been the increase in capital. In 2007, after the cedi was redenominated, the minimum capital requirement for commercial banks was raised from GHS7m ($2.67m) to GHS60m ($22.9m), and in 2013 was increased further to GHS120m ($45.7m) for all new banks. For rural and community banks, the requirement went from GHS50,000 ($19,060) to GHS150,000 ($57,180), and in 2013 the BoG said it would increase this again to GHS300,000 ($114,360). For non-banks, the BoG issued minimums in 2011: GHS100,000 ($38,120) for susu collectors and GHS60,000 ($22,870) for moneylenders.

The subject of capitalisation has had its ups and downs. While the BoG has given local institutions time to comply, it has been more strict with foreign banks a grace period to adjust to the new requirements, which has helped them avoid mergers or stock sales. However, it has also left foreign banks better able to pursue larger deals domestically, putting local institutions at a comparative disadvantage.

Shock-Absorption

Other regulations were put in place briefly as a result of the economic instability, but were soon reversed. In February 2014 the BoG took a number of measures that were designed to halt the depreciation of the cedi, which against the dollar has been one of the worse-performing currencies in recent months (see Economy chapter), and many of these measures involved the banking sector. In August 2014, however, the central bank then reversed many of its decisions, citing “consultations with stakeholders and the general public, as well as an analysis of the available data”.

In early 2014, the central bank had reiterated a 2012 notice that required all transactions in the country to be carried out in the local currency. In addition, the central bank also added a few new rules and revised some older ones. It declared that no cheques or cheque books could be issued for foreign currency accounts in the country.

Cash withdrawals from foreign currency accounts, moreover, would be limited to $10,000, and only if the customer needed the funds for travel. Following the reversal of its decisions in August 2014, however, customers can now make large transactions over the counter once again, provided they give the bank a few days’ notice before the withdrawal.

In February 2014, the BoG had also banned all transfers between accounts denominated in different foreign currencies. Furthermore, foreign-currency transfers out of the country could only be made with proper documentation. Foreign-currency loans were only permitted to earners of foreign currency, and indeed all foreign-currency facilities were meant to be converted to local currency. All of these rules have now been scrapped.

The BoG had placed further restrictions on foreign exchange bureaux. Originally, the central bank said that such companies were forbidden from trading more than $10,000 in any single transaction; that they must computerise their operations and use certified software by April 30, 2014; and that they must stop issuing manual receipts, keep electronic records and submit monthly returns to the central bank in a timely manner.

The spread between the bank rate and the black market rate had become particularly pronounced earlier in the year. According to local media, in late May 2014 the black market rate was 3.50 per dollar while the interbank rate was 2.98.

Through these various measures, the central bank was attempting to gain full control over the trading of the Ghanaian currency. It has also made technical adjustments to improve trading in the cedi. In January 2014 the central bank required that all banks continuously quote a buy and a sell price for the currency, and that they limit the spread between the two prices to 200 basis points.

These were of course not the only tools at the central bank’s disposal. It has also used monetary policy to slow the decline of the local currency, which dropped from a rate of 2.05 to the dollar to 3.50 to the dollar in a one-year period. In response, the BoG raised its monetary policy rate from 18% to 19% in July 2014, after increasing it from 16% the previous February. The rate had been as low as 12.5% in 2011.

Limits Of Policy

The decline in the value of the Ghanaian currency – a trend that is largely due to the country’s “high fiscal and external current account deficits, which are partly driven by external shocks”, according to Kofi Wampah, the governor of the BoG (see viewpoint) – has put the central bank in a tough position as it seeks to help the country navigate its way out of currency depreciation. In 2014 a private individual filed a legal suit against the central bank because of its failure to maintain a stable currency. In July of that year, the country’s Supreme Court ordered the BoG to submit its defence in the case.

Kofi Arkaah, an economist and analyst, told local press that the BoG should place limits on the percentage of bank assets that can be invested in government securities. The widespread practice among local banks of buying up lots of high-yield sovereign bonds not only increases their exposure to the government’s fiscal risks, it also reduces overall lending to the private sector.

With yields on three-month Treasury bills at 26.25% in August 2014, banks have had little incentive to focus on retail lending – retail deposits of similar duration pay just over 10%, despite inflation of around 15%. Closing this gap, however, could bring its own “If the government lowers the interest rate on Treasury bills, there is a risk that investors will move that capital to dollar assets, further exacerbating the pressure on the cedi,” Prince Kofi Amoabeng, the CEO of UT Bank, told OBG.

Tools Of Growth

Regulators are working on new instruments to help open up opportunities for the sector. One area in particular that is beginning to get their attention is sharia-compliant, or Islamic, banking. Not only is the formalisation of shariacompliant finance seen as a way to serve and attract the country’s Muslim population, which accounts for an estimated 18% of the total, it is also seen as a way to get the local financial markets moving. At present, however, no formal framework for Islamic banking is yet in place.

The BoG is also working to implement a formal saver-protection scheme that will cover depositors. It aims to have a system for this in place by the end of 2014. Meanwhile, the central bank is also working on revising the Banking Act in a way that better accounts for the connected nature of the financial system and enables regulators to deal more effectively with systemic risk.

“The laws governing financial institutions should remain in tandem with the times and the patterns of growth,” Alex Mbakogu, the managing director of leasing firm Leasafric Ghana, told OBG. “As risk appetite and risk perception evolve, so should the relevant regulations.”

On the whole, banking regulations in Ghana are robust, fair and reasonable. The current set of laws and rules allow for flexibility while also placing limits on the sector and permitting significant intervention by the central bank. Indeed, some players in the sector think that in certain areas greater supervision would be warranted.

Desmond Nartey, the executive director of CDH Securities, believes that the bias may be too much toward financial inclusion and that in some cases the bar may have been set too low for rural banks. “The biggest problem in the banking sector is over-deregulation,” he said. “The authorities were attempting to increase accessibility, but I think it was overdone.”