Strong prospects remain for Ghana's banking sector despite slowing growth

The Ghanaian banking sector had a difficult year in 2015, amid weakening macroeconomic conditions in the country. Growth fell below the rate seen in 2014, while non-performing loans (NPLs) rose significantly. However, the sector remains one of the economy’s brightest performers, and the large unbanked population offers plenty of scope for expansion.

Indicators

While total banking sector assets increased by 23% to GHS63.4bn ($16.4bn) in 2015, growth fell below the 42% the sector enjoyed in 2014. Asset quality also took a hit, with NPLs increasing by 63% over the course of the year to GHS4.4bn ($1.1bn) as of December 2015. The increase in NPLs is a result of the general macroeconomic climate, the power crises and unpaid debts owed by Bulk Oil Storage and Transportation Company (BOST).

Following five years of encouraging drops, loan loss provisions as a percentage of gross loan portfolios spiked from 4.58% as of December 2014 to 6.28% a year later. Private sector interest rates topping 30%, coupled with structural weaknesses throughout the economy, hampered the sector’s performance in 2015. This period saw limited deterioration in liquidity and capital adequacy, indicating stability in the sector as a whole. The ratio of liquid assets to total core assets fell from 26.8% in 2014 to 26.4% in 2015, and the capital adequacy ratio for the sector dipped from 17.9% to 17.8% over the same period. The drop in net income was more dramatic, contracting by 7.4% in 2015, compared to growth of 35.5% in the previous year. The growth of bank deposits also weakened over the course of 2015: the GHS41.2bn ($10.6bn) worth of deposits in the system as of December 2015 represented a 23% rise over 2014, following 39% increases in both 2013 and 2014.

Major Players

Ecobank is the largest bank in Ghana by assets, deposits and loans. As of December 2015 the Togo-based bank had total assets of GHS6.692bn ($1.7bn), customer deposits of GHS4.838bn ($1.2bn), and loans and advances to customers of GHS3.118bn ($804.4m). It provides personal, retail, corporate and investment banking services at 77 branches throughout the country. Formerly Ghana Commercial Bank, GCB Bank is the largest locally owned financial institution in the market. As of December 2015, it held total assets of GHS4.659bn ($1.2bn), and has the largest banking network in Ghana, with 160 branches and over 250 ATMs. Established in 2006 and owned by local and foreign investors, Fidelity Bank comes next, with assets of GHS4.089bn ($1.1bn). uniBank had total assets of GHS3.831bn ($988.4m), total deposits of GHS2.728bn ($703.8m) and loans of GHS2.475bn ($638.6m), while the country’s fifth-largest bank, Barclays Bank of Ghana, held GHS3.611bn ($931.6m) in assets in December 2015, and operates a network of 60 branches and 150 ATMs. CAL Bank, a commercial bank established in 1990, held total assets of GHS3.365bn ($868.2m), total deposits of GHS1.603bn ($413.6m) and loans of GHS1.805bn ($465.7m). National Investment Bank (NIB), which focuses on development and commercial banking, had GHS2.72bn ($701.8m) in total assets, GHS1.78bn ($459.2m) in deposits and GHS856m ($220.8m) in loans outstanding. Headquartered in Nigeria, Zenith Bank had total assets of GHS2.549bn ($657.6m), customer deposits of GHS2.045bn ($527.6m) and customer loans of GHS983.97m ($253.9m), while Agricultural Development Bank (ADB), in which the government holds a 52% stake, held assets of GHS2.134bn ($550.6m), customer deposits of GHS1.514bn ($390.6m) as of December 2015 and maintained 78 branches.

Crowded Market

According to the Bank of Ghana (BoG), as of the end of 2015 there were a total of 29 deposit money banks operating in the country, 12 of them Ghanaian and 17 foreign, operating a total of 1173 branches and 912 ATMs. There were also 62 non-bank financial institutions (NBFIs), 139 rural and community bank, and a combined 546 microfinance institutions (MFIs). Johnson Asiama, second deputy governor at the BoG, told OBG, “We probably have too many banks and new ones are still coming in. We have a free entry and exit policy once you meet the minimum requirements.”

In an example of this, 2015 saw the entrance of First National Bank, a subsidiary of FirstRand Group of South Africa. Rather than enter the market through acquisition, First National’s CEO, Jacques Celliers, said the bank decided to “set up an entirely new greenfield operation free from existing structures.”

While the number of banks in Ghana may not be ideal, the BoG does not foresee the need for forced consolidation. “Once we restore macroeconomic stability and promote the stability of banks, consolidation could begin to occur naturally,” Asiama told OBG.

NPLs grew from 11.3% of total gross loans in December 2014 to 14.7% in 2015. In light of this, most leading banks announced loan loss provisions at the close of 2015. Asset quality may continue be a problem for banks into 2017. “In the immediate future it will continue to be a challenge, primarily because of the rising level of NPLs ... and there are some quite significant ones,” Robert Yakohene, head of research and business development at UT Bank, told OBG. “I am not expecting us to have hit the bottom yet. I expect that 2016 will be slightly worse than 2015. I even anticipate 2017 might still see us finding the real bottom before the sector starts to come back up.”

Interest Rates

The benchmark monetary policy rate of the BoG rose from 12.5% in early 2012 to 26%, and then was lowered by 50 basis points in November 2016. While banks pass the higher rates on to their customers, increasing levels of NPLs in 2015 illustrated the limited benefit of interest rate pass-through. The steep rise in rates came on top of high street commercial loans that already posted rates of over 20% before the most recent monetary policy rate spike, which reflected the opacity of the credit system in Ghana and the high overheads banks face. However, this in turn has made it very difficult for businesses to manage their debt. “The banks don’t benefit from a high-interest-rate regime because it increases the probability that people will default,” Kwame Baah-Nuakoh, senior vice-president for marketing, research and corporate affairs at The Royal Bank, told OBG, “If you are charging high interest rates, those that are most likely to come for the money are those that are most likely to engage in risky investments, so you are more likely to select the bad investments,” he added.

Lending

Data for the first quarter of 2016 suggested that banks had slowed lending in an effort to reverse the NPL increase of 2015 and minimise credit risk. According to BoG data, private sector credit declined by 6.8% in real terms in the year ending March 2016. This is compared to growth of 17.9% a year earlier. Over the first quarter of 2016 credit provision remained stagnant. In nominal terms, total outstanding credit registered at GHS30.19m ($7.79m) for the quarter ending March 2016, virtually unchanged from the GHS30.23m ($7.8m) in December 2015. Robert Quansah, head of business intelligence, strategy and market risk at Bank of Africa Ghana (BOA Ghana), told OBG, “Financial performance for 2016 will be better than it was for 2015 because most banks have already made provisions for the elevated bad books. Banks have reduced lending, especially to the corporate sector because that is where you get a big hit.”

As a result, the proportion of the banking sector’s overall investments that are held in Treasury bills had risen from 39.2% in 2006 to 79.1% by the end of 2015. The push to buy up government debt is constraining room for future lending and helping sustain the elevated interest rates, which in turn has prompted the government to reduce its borrowing profile in the domestic market (see Economy chapter).

Bank Borrowing

As interest rates began their ascent while the Ghanaian cedi started its descent in 2012-13, banks slowly reconfigured the sources of their own borrowing. From a height of 84% in 2013, short-term borrowing by the banking sector has steadily declined, falling to 56.6% in December 2015.

In response to the dramatic rise in interest rates in recent years, banks have been swapping short-term debt for longer-term debt, thus protecting themselves from future rate increases. Likewise, as the cedi declined, banks shifted their borrowing away from foreign sources. From a high of 62.7% in 2013, foreign borrowing decreased to 41.5% in December 2015 as banks reduced their dollar exposure in the face of a depreciating domestic currency.

Regulation

The BoG, which serves as the industry regulator, has a deserved reputation for effective oversight, helping ensure that the fundamentals of a sector largely concentrated on core banking services the Institute for Fiscal Studies, told OBG, “The only sector of the economy that is making a profit is banking – not because they are exploiting the system but because the BoG is pursuing monetary policy in a way that creates opportunity for the banks to cash in.”

That said, several bankers in the country told OBG of their desire for greater transparency from the BoG during the deliberations over potential new draft regulations. Banks have the option to comment on pending changes, but may only do so after the initial drafts have been issued by the BoG.

Pending Reforms

The BoG spent the first half of 2016 considering the path towards implementation of the Basel regulatory frameworks in 2017, and studying the possibility of updating the calculation for the base rate, the minimum rate at which banks are allowed to set lending rates. There is also potential for new capital requirements, as a result of the Asset Quality Review initiated as part of Ghana’s programme with the IMF. While there are few concerns that the sector as a whole is not adequately capitalised, the review found that smaller banks may need to improve their capitalisation and liquidity. As of July legislative changes to the regulations with regard to capitalisation were being discussed in Parliament, with a decision expected by the end of the year.

Basel Frameworks

In late 2015 the then-governor of the BoG, Kofi Wampah, announced his intention to integrate the Basel II and Basel III frameworks into the Ghanaian banking sector by mid-2017. Several aspects of the Basel Accords have already been incorporated into the regulatory framework, including the full adoption of international financial reporting standards and the principles of risk-based bank supervision. To meet the other Basel objectives, the central bank has drafted guidelines and recommendations for banks, and developed a roadmap to steer implementation. The IMF has appointed a permanent technical adviser to drive this process. While the BoG and the IMF are moving ahead with implementation of the Basel II and Basel III Accords, there have been questions – as is the case in many emerging and frontier financial and banking sectors that were largely unaffected by the sub-prime contagion – as to whether a regulatory framework devised in Europe and chiefly intended for the more complex banking systems of the EU and the US is in the best interests of the Ghanaian banking system, which is still developing. Baah-Nuakoh told OBG, “The regulation must be modified to suit the jurisdiction without compromising the objective.”

Financial Inclusion

As is the case in much of sub-Saharan Africa, a significant proportion of Ghana’s population has little or no access to the formal banking system. According to the World Bank, only 40% of the adult population had a bank account in 2014, while less than 20% had a formal savings account. This was roughly in line with or better than many other ECOWAS economies – in Côte d’Ivoire, for example, these figures stood at 34% and 9%, respectively – but well behind other continental markets, such as South Africa (70% and 33%) and Kenya (75% and 30%). As a result, expanding financial inclusion remains one of the priorities of the central bank, and the rise of technology has played a key role in bringing more Ghanaians into the financial fold. Mobile banking platforms spearheaded by the telecoms sector, the dramatic growth of microfinance and the emergence of NBFIs have all contributed to this effort.

Joe Jackson, director of business operations at Dalex Finance, told OBG, “Mobile money can hit the bottom of the pyramid and increase Ghana’s financial inclusion numbers by leaps and bounds. On average, 41% of the population does not have access to commercial banking services, but close to 90% of the adult population has access to mobile phones.”

Mobile money programmes have yet to enjoy the same success that the M-Pesa system has seen in Kenya, where the total volume of transactions processed annually is estimated to have surpassed one-third of overall GDP. However, mobile products such as micro-lending, -investment and -insurance that are convenient and affordable, and aimed at lower-income Ghanaians, are serving as a first step into the formal financial sector for many people. The benefits of tapping into the wider population, despite the lower incomes, are clear. Daniel Anderson, manager of the Ridge branch at HFC Bank, told OBG, “With virtual money and virtual wallets, people need a bank account to hold the money. You can get the deposits on your books and serve as a channel to pay out the money to clients. I see it as an opportunity to partner with these institutions.”

Microfinance

Given Ghana’s large informal sector and substantial unbanked population, MFIs have been very active in providing access to financial services to those at the bottom of the economic pyramid. MFIs transact in very small amounts, offering loans as small as GHS200 ($51.60). Given the small sums involved and MFIs’ role in expanding financial inclusion, the BoG outlined a very flexible regulatory framework. “Before we realised it,” Asiama told OBG, “those MFIs started doing the very things that banks do, and we were caught by surprise.”

As a result, the number of MFIs operating in Ghana has grown to over 500, and the scope and depth of their product offering has expanded considerably. However, the long leash provided by the BoG led to lapses in governance. The most notable example of fraud came in 2015, when DKM Diamond Microfi-nance was found to have inappropriately invested over GHS115m ($29.7m) in deposits and failed to return funds to its customers. This led the BoG to close DKM, along with 70 other MFIs operating in Ghana because they failed to comply with its requirements. This has had knock-on effects for the expansion of the retail financial sector in the medium term. Given that MFIs had been many Ghanaians’ first and only experience of the formal financial sector, it has led to distrust of these institutions. Linda Asirifi-Otchere, research manager at UT Bank, told OBG, “The average person does not know the difference between an MFI and a bank. Once they are collecting money, they tag everything as a bank. Therefore the image of the industry as a whole was affected.”

In an effort to rebuild trust in the system, the BoG has stepped up its oversight of the sector, including deploying staff to its regional offices to maintain stricter supervision over rural MFIs. It is also reviewing the entire process of licensing new MFIs. The BoG intends to improve collaboration with law enforcement agencies to deal swiftly with illegal financial services providers and intensify public education on financial literacy. Millison Narh, first deputy governor at the BoG, told a media briefing in January 2016 that the regulator had raised the minimum paid-up capital for MFIs and money lending companies from GHS500,000 ($129,000) and GHS300,000 ($77,400), respectively, to GHS2m ($516,000). Existing MFIs have until December 2018 to meet the minimum capital requirements. New entrants would require the new minimum prior to granting of the final licence.

Another key development was the passage of the 2015 Special Deposit Protection Bill, which protects depositors from a potential loss of funds. Although the protection cap of GH6250 ($1612) was deemed low by the market, it was seen as a good start.

Retail Trends

While corporate banking comprises a large proportion of activity in Ghana, retail activity has been increasing as banks look to expand their deposit base and deepen financial service penetration. Boosting personal lending, for example, particularly to the middle class, has become a focal point for retail bankers. BOA Ghana’s Quansah told OBG, “What we are doing more now is personal loans to salaried employees. The main factor in personal loans is secured employment. Once people are working and receiving salaries, they will repay the loan.” One of the primary challenges in personal lending is the lack of accessible and verifiable credit history. To overcome this, banks have begun to more aggressively link savings and credit. One such product offered by BOA Ghana allows customers with one full year of regular monthly savings deposits to borrow up to 200% of the value held in their account at the end of the year.

At the other end of the income spectrum, higher-net-worth customers are using their leverage to cut into the margin that banks traditionally realise over the interest rate they pay on savings accounts. Customers entrusting larger sums of money are demanding higher interest rates on savings. “It is a competitive market. The depositors know that it is a buyer’s market and they are determining where to place their money,” Anderson told OBG. “Many customers are demanding rates of Treasury bills plus 1-2%.”

With Treasury bill rates above 20% during 2016 — and at 21% as of the fourth quarter — some banks have been offering special savings accounts that pay up to 30% interest. While this translates a higher hurdle rate for banks to clear to profitably mobilise deposits, current corporate and personal lending rates are sufficiently high that banks have nevertheless enjoyed good margins.

Mortgages

The BoG does not publish data on mortgage rates and penetration in the country, but estimates put mortgage loan penetration at around 3%. Similar to other forms of lending, interest rates make obtaining a mortgage beyond the reach of many households in Ghana. In May 2016 the average annual interest rate charged by banks for a mortgage was 30.6%. Of the deposit money banks that provide mortgage loans, GN Bank offered the lowest rate at 15.1%, followed by Standard Chartered (18.4-28%) and Bank of Baroda (21%). Those with the highest mortgage interest rates were uniBank (40.8-45.8%) and The Royal Bank (40.2%), according to the BoG.

While the interest rate on a dollar-denominated mortgage can be much lower, the added currency risk makes it an unpopular option for Ghanaians. As is the case in other emerging markets, a hurdle to expanding the mortgage sector is the unfamiliarity of the product among many people. “Because rates are very high, mortgages are not attractive to many people, but the rising young middle-income population understand mortgages,” HFC Bank’s Anderson told OBG. “I think the future for the sector is bright.”

The Social Security and National Insurance Trust, the state pension fund, also recently urged the government to work to deepen the mortgage market, and plans to direct a portion of its investments to increasing the supply of available housing.

Listings

The banking sector, which already plays a leading role on the Ghana Stock Exchange (GSE), was seeking to expand its presence in 2016. Following a failed attempt by ADB to list in spring 2015, the bank announced a relaunch of its initial public offering (IPO) in November 2016 and listed in 2016. The government is expected to maintain a minority stake in the bank following the conclusion of the IPO. Separately, the BoG announced in October 2016 that it will cede to the government its ownership stake in ADB and NIB, in which it holds 48% and 44% stakes, respectively. Through this move, the central bank hopes to reduce the potential for conflicts of interest in its capacity of bank supervisor. Nigeria-based Access Bank also announced plans to launch an IPO in November 2016 to raise GHS104m ($26.8m). Shares will be priced at GHS4 ($1.03) each, and will trade on the GSE. The company listed in December 2016.

Outlook

The banking sector’s expansion slowed considerably in 2015, weighed down by low economic growth and a rise in NPLs, yet it continues to outperform most sectors of the economy. However, banks are using 2016 to retrench, lower their risk exposure and attempt to turn around weaknesses in their loan portfolios that were held over from 2015. Additional uncertainty created by the general election in December 2016 will reinforce conservative behaviour, but the sector’s prospects in 2017 are bright. Baah-Nuakoh told OBG, “It is still a growing sector because there is still a large unbanked population. In the banking sector we are still finding our feet, looking for territories to bring people in. The industry has not reached saturation.”

If the government can lower interest rates and maintain a stable currency in 2017, economic growth should accelerate and so will demand for banking products and services. Banks are also looking forward to the restructuring of the BOST’s debt as it could help avert future problems in the sector.