Banking reforms in Ghana to encourage consolidation and promote best practices

Since the privatisation of state banks and the liberalisation of industry in the late 1980s, Ghanaian banks have increased in stature and number, and for much of the last decade they have enjoyed strong growth rates and large profit margins. The country’s lenders have maintained their stability, avoiding the domestic crises that have befallen some of their emerging and frontier market peers and sidestepping much of the fallout from the global financial crisis.

However, the industry faces three major challenges: non-performing loans (NPLs) stemming from the 2015 energy crisis, slow credit growth to the private sector and an overcrowded market made up of undercapitalised small banks. President Nana Akufo-Addo discussed these issues in his speech at the 60th anniversary celebration event for the central bank, the Bank of Ghana (BoG), in August 2017 – four days after the BoG had been forced to oversee the emergency takeover of two local banks, as their insolvency issues were deemed beyond remediation. Although President Akufo-Addo praised the bank for ensuring price stability, creating an enabling environment and for its timely response to recent bank failures, he also added a note of caution: “The current weaknesses in our banking sector need to be addressed forcefully to minimise any adverse financial consequences to unsuspecting savers, and their spill-over effects on the economy.”

In Figures

By the end of the first half of 2017 the banking sector’s assets stood at GHS86.7bn ($20.8bn), up more than 30% on the GHS66.3bn ($15.9bn) registered at the end of June 2016. Of these assets, some 91.2% were held within Ghana. Following the August 2017 takeover of Capital Bank and UT Bank, the total sector assets are now split between 34 commercial and universal banks registered in the country, of which 17 are foreign-owned and 17 domestically owned. In all, the number of bank branches in operation across Ghana’s 10 regions totalled 1377 by the end of 2016, an increase of more than 200 on the previous year.

A survey of 25 banks by global financial services firm PwC found that the 10 largest banks in Ghana each had operating assets of over GHS3bn ($718.2m) at the end of 2016, while another 11 banks held asset values between GHS500m ($119.7m) and GHS3bn ($718.2m), and the remaining banks had less than GHS500m ($119.7m). The largest five banks by assets are Togobased regional institution Ecobank, with GHS7.28bn ($1.7bn); locally owned Ghana Commercial Bank (GCB) with GHS5.69bn ($1.4bn); local group uniBank with GHS5.53bn ($1.3bn); Barclays Ghana with GHS5.11bn ($1.2bn); and Stanbic Bank with GHS4.97bn ($1.2bn).

Over the course of 2016 uniBank recorded the largest growth in asset size with an increase of 51% over the previous year, largely due to intense efforts to grow its customer base, particularly in the small and medium-sized enterprise loan segment. Barclays was a close second with expansion of 49%. Outside of the top five banks, United Bank for Africa saw the fastest expansion, finishing 2016 with GHS3.7bn ($885.8m) in assets, an increase of 57% on the previous year, overtaking CAL Bank and Zenith Bank for eighth spot.

Deposits

The banking sector’s deposits continue to grow at a brisk pace, with the total tripling from GHS18.3bn ($4.4bn) at end-2012 to reach GHS54.5bn ($13bn) in July 2017. Roughly half this sum is kept in current accounts, with another quarter in fixed deposit accounts and a further 10% in savings accounts.

The top five banks by deposit size are the same as those by asset size, with the exception of Fidelity Bank, which takes uniBank’s position. Ecobank remains the market leader with a 12.1% share of deposits. In September 2017 the annual percentage rates on Ghanaian deposits varied widely by bank, with Standard Chartered and FBN Bank offering rates of 4.9% and 5.3%, respectively, while Premium Bank, Omni Bank, Royal Bank and Bank of Baroda all offered rates of 14.5% or higher.

Credit

While deposit books are growing, credit lines are tightening, following the trend seen in many other West African banking sectors. By July 2017 net loans and advances stood at GHS31.53bn ($7.5bn), representing year-on-year (y-o-y) growth of 10.6%. However, this was slower than the 12.6% annual growth in credit in 2016 and the 2015 rate of 29.1%. As a share of total assets, loans and advances fell from 47% in 2015 to 41% in 2016.

Private sector credit fared less well. In the first six months of 2017 total private sector credit reached GHS32.65bn ($7.8bn), representing 2.6% y-o-y growth. This came on the back of a very weak 2016 figure, which was down 8.2% on the previous year. One reason for this slowdown in lending over the course of 2016 was the BoG’s high benchmark interest rate, which increased from 12.5% in 2012 to 25.5% by the end of 2016, contributing to a reduction in appetite for loans.

NPL

Historically, the country’s energy sector has recurrently had large-scale NPLs. Two state-owned enterprises – the Tema Oil Refinery (TOR) and the main electricity generator and supplier, Volta River Authority (VRA) – owed GHS3.2bn ($766m) in unpaid loans in 2016. In addition, bulk oil distribution companies (BDCs) owed a further GHS500m ($199.7m). BDCs were set up to sell imported petroleum products to the local market at a fixed price, with government subsidies intended to make up any shortfall. In 2015, however, the payment of this subsidy was delayed, leading BDCs to default on their debts to banks. “In 2016 the energy sector, including BDCs, accounted for about GHS2.5bn ($598.5m) of NPLs in the Ghanaian banking sector,” Thomas Boansi-Sarpong, financial controller at CAL Bank, told OBG. “However, even this audit did not take into account all aspects of the total debt. When a clear government plan to address the issue failed to materialise, many banks, including ours, were forced to take a haircut of 30% of debt. Later the government paid around 30% of the debt, leaving 40% on our books. We are currently pursuing BDCs, and some of them have made payments to show good faith.”

Other banks were unable to keep their heads above water, however. For example, the failure and subsequent takeover of UT Bank and Capital Bank in August 2017 was largely due to their unsustainable NPL books, combined with mismanagement by their respective holding companies. Moving forward, industry players are hopeful that the persistent issue of NPLs will subside. “As the economy resumes growth, along with better enforcement of collaterals through the new addressing system and improved land registration, we can expect to see a decrease in NPLs,” Osei Asafo-Adjei, managing director at The Royal Bank, told OBG.

Clearing Debt

The government has already taken several steps to ease the effects of energy sector pressures on banks. Foremost among these is that state-owned enterprises have started to pay off part of their restructured debt. “NPLs from the state sector have slowed thanks to the VRA and TOR debts being restructured and partially repaid since September 2016,” Sulemana Mohammed, CEO of Doobia, a web portal for financial research and analysis, told OBG. “So far those payments have been coming through, and banks had received three payments from the VRA as of mid-2017. The biggest issue for banks remains BDCs which still have significant debt, as BDCs first need the government to pay them the money they are owed in order to be able to make repayments.”

As part of efforts to consolidate energy sector levies and pay back BDCs, the government passed the Energy Sector Levies Act in 2015. This measure proved effective, with the banking sector’s exposure to NPLs from BDCs falling to around GHS500m ($119.7m) by the end of 2016, while restructured debts from TOR and the VRA were in the process of being paid off. Additionally, a new GHS6bn ($1.4bn) government bond aimed at settling energy sector debt was launched in October 2017. Another remedy is to reform how credit is assessed: “Ghana urgently needs a credit scoring system based on a comprehensive identification system,” Frank Brako Adu Jr, managing director of CAL Bank, told OBG. “This would reduce delinquency ratios and could further stimulate overall access to credit.”

While the restructuring of legacy debt from state-owned enterprises has seen some success, NPLs in the private sector continue to increase. By June 2017 the overall NPL ratio had reached 21.2%, totalling GHS7.96bn ($1.9bn). This represented a 2.4 percentage point increase on the June 2016 figure, when the ratio stood at 18.8%, and well above peer markets like Nigeria, Kenya and Côte d’Ivoire. Of this total, the private sector accounted for 94.9% of NPLs, up from 87.3% the previous year. Over one-third of NPLs originated from the commerce and finance industry, while the utilities, manufacturing and services sectors were each responsible for over 10% of NPLs. Although the agriculture sector was responsible for only 8% of NPLs, it had the highest NPL ratio of any segment at 30.3%.

Profitability

The rise in NPLs has combined with tightening credit lines to erode banks’ profitability. The sector’s pre-tax profits of GHS1.5bn ($359.1m) for the first half of 2017 represented a 0.4% decline on the previous year’s figure, coming on the back of a difficult 2016. In that year pre-tax profit grew to GHS2.7bn ($646.4m) from GHS2.4bn ($574.6m) in 2015, but those profits were unevenly distributed, with twothirds of banks surveyed by PwC recording less favourable results in 2016 than in 2015. The profit-before-tax margin for banks remained relatively stable between 2015 and 2016, at 33.3%, but this was down from the 2013 and 2014 figures of 45.9% and 48%, respectively.

In the last four years India’s Bank of Baroda has been an outlier, consistently chalking up margins of over 85%; only six other banks had margins of over 40% in 2016. Some 13 banks had margins under 20% in 2016, up from seven in 2015. Sector-wide, return on assets at the end of June 2017 was 3.7% and return on equity was 17.7%. Both of these indicators of profitability were down on their respective June 2016 figures of 4.9% and 22.9%.

There are some indications that the sector could have already climbed out of the trough, however, with banks using 2016 and early 2017 to reorganise their loan books and separate NPLs from loans in good standing. “Over the course of 2016, banks’ profitability was hit hard, mainly because of the high level of NPLs and the resulting high impairment charges,” Mohammed told OBG. “But a lot of banks took the initiative to analyse their loan books and, under new BoG guidelines, reclassified loans that had missed payments for three months as NPLs, whereas before the period had been much longer. This shift in the way NPLs are reported led to the NPL rate shooting up, but it is positive in that it allows banks to separate good debt from bad.”

Private Sector

Moving banks away from government debt and towards increased lending to the private sector would boost numerous sectors of the economy, but it remains a challenge. When the growing NPL portfolio made banks tighten their lending requirements, Treasury bills offered rates of 20%, providing a far more secure investment. Over the course of 2016 net interest income in the sector increased 19% y-o-y to GHS5.8bn ($1.4bn), though this improvement was mainly due to better returns on government paper. The proportion of interest income originating from loans and advances fell from 64% to 54% over the period, while the rise in income from investment securities surged by 32.1% to GHS3.3bn ($790m). Banks’ total holdings of government Treasuries shot up 47% to GHS18bn ($4.3bn). This trend continued into the first half of 2017, with income from loans falling to 44.1% and investment income rising to 40.1%. Fees and commissions remained stable, representing 10% of income. “Once we have cleaned up the energy sector legacy debt, for which the bond release is vital, the next question for the banking sector is how to stimulate an economic recovery that makes business more viable and avoids collateral damage in the private sector,” Sampson Akligoh, director of the Financial Sector Division at the Ministry of Finance, told OBG.

Nevertheless, with the fall in 91-day bills – which reached 12% by October 2017 from 22.9% a year earlier – this situation is beginning to change. “Because of the effects of the energy crisis in 2015, many banks took protective positions in 2016 and 2017, meaning their loan books shrank,” Robert Quansah, head of strategy for Bank of Africa, told OBG. “Nobody wants to increase their NPL position, but with the money market at 12%, banks have no choice but to lend. We have to hope that the macroeconomic conditions for business improve with the new government,” he added.

The preferred sectors for loans and advances remained relatively unchanged in 2016, with the largest proportion of capital funnelled to the financial sector (24.9%), followed by services (18.9%), utilities (13.3%), manufacturing (9.2%), transport (9%) and construction (8.1%). The high rate of NPLs in the agriculture and fisheries sector constrained the issuance of new loans, resulting in the sector receiving just 2.5% of loans.

Agriculture

Ghana’s farmers and fishermen receive a low percentage of extended credit, which arguably results in a host of negative flow-on effects for the rest of the economy. “Central bank numbers can be deceptive, because banks lend large amounts to large corporations, but in the small and medium-sized enterprise sector over 70% of loans come from non-banks,” Joe Jackson, director of business development at one of the country’s largest non-bank lenders, Dalex Finance and Leasing Company, told OBG. “A lot of people talk about the impact of the oil sector on the Ghana economy, but it accounts for only 5% of GDP. The key to improving the economy is supporting the agriculture sector. If we focused our lending and investment there, 40% of the population would see a positive change.”

Indeed, results have shown that private sector investment in Ghana’s smaller players can be highly profitable. “We have seen that banks that invest 30% of funds in Treasury bills and 70% in private sector loans are more profitable than those that do the reverse,” Akligoh told OBG. “The government would like other banks to follow their example, but detailed information about banks, their rates and their balance sheets is not widely available. Smaller banks need better access to information to understand how to be successful in the private sector, otherwise they will keep looking to government paper.”

Project Finance

The government’s central rural development and industrialisation programmes – One Village, One Dam and One District, One Factory – as well as the anticipated $7.3bn upgrade of the nation’s road and rail infrastructure, present a new pipeline of projects that will need financing. This is something that banks are keen to tap into. However, local banks face a number of challenges when financing big-ticket projects, not least the lack of liquidity caused by the NPL rate. “Funding for large-scale infrastructure projects was difficult in the past. At the moment, banks are looking to the government and the energy bond specifically to help resolve liquidity issues,” said Quansah. “If the bond succeeds and the banks are paid back their outstanding loans, some of them may have the capacity to fund such infrastructure projects, but right now very few banks are in a position to do so.”

Most local lenders also lack long-term capital and sufficient reserves to endure delayed repayment. “Funding for construction projects is definitely needed in Ghana, and I think both local and foreign financing will enter this market,” Mohammed told OBG. “However, around two-thirds of the banking industry’s assets come from deposits and many of these are current accounts and short-term savings accounts with a maturity of less than a year. Lacking long-term capital, banks find it hard to lend to long-term projects, especially when delays in payment from government projects are common.”

In response to demand, July 2017 saw the establishment of Ghana’s Construction Bank, which provides commercial and consumer banking, and will have a strong focus on project finance in construction. Millison Narh, then-first deputy governor at the BoG, told the bank’s launch event in Accra, “The opening of this bank in my view is in recognition of the growing importance of the construction sector in the economy.” Vice-president Mahamudu Bawumia allayed fears of delayed payments by declaring that future government contracts would only be awarded under strict conditions that guaranteed the availability of funds.

Consolidation

For years the BoG has openly advised consolidation and put forth increased minimum capital requirements to encourage it. However, it also granted four new licences between January 2016 and July 2017. The BoG’s latest move in this regard, to more than triple minimum capital requirements to GHS400m ($95.8m), appears to be stimulating merger and acquisition activity among independent banks (see analysis). It is worth noting that although conditions for lending remained negative over the course of 2016 and 2017, most banks remain well above the minimum capital adequacy ratio (CAR) of 10%. In July 2017 uniBank and Ecobank recorded the lowest CARs, at 10% and 11%, respectively, while Barclays Bank, GCB and Fidelity Bank all held more conservative positions, at 24%, 25% and 30% respectively, and as a result have less of a need to resort to acquisition and merger activity.

Mobile Money

As is the case throughout Africa, mobile money (MM) has become an increasingly attractive tool for lenders in reaching retail customers. According to World Bank figures, 40% of Ghanaians owned a bank account, 19% had a formal savings account and 8% had a formal loan from a bank, as of 2014. While these figures do not account for the vast number of micro-loans and savings schemes offered by hundreds of microfinance institutions (see analysis), boosting bank penetration is a key step in reaching the government’s goal to formalise the economy.

Mobile phone operators could play a pivotal role in spreading the use of banking products across the country. Mobile phone penetration in Ghana reached 137% in April 2017, with many individuals owning multiple lines. The main operators, including MTN, Airtel, Vodafone and Tigo, have established their own MM systems, and Ghanaians have been keen to adopt the technology. Since its introduction almost a decade ago, there has been a rapidly expanding MM user base, with people using the platform to make peer-to-peer payments, pay utilities bills and receive salaries through mobile wallets. Between 2012 and 2015 the value of MM transactions increased from GHS594m ($142.2m) to GHS35.4bn ($8.5bn). In 2016 alone this figure grew by 58% to GHS56bn ($13.4bn), with MTN’s mobile money platform accounting for GHS23bn ($5.5bn) of this total.

In its August 2017 study on the impact of the segment, the BoG noted that MM was becoming a popular means of payment for unbanked Ghanaians. It attributed recent growth to improvements in mobile handset functionality, advances in network technology and an upgrade of point-of-sale infrastructure. “Ghana is now facing a revolution in the financial sector due to MM, which offers huge convenience to users,” Jackson told OBG. “All the commercial and rural banks put together have about 5000 points of contact while MM has 75,000, some 15 times more. The operators are more efficient than banks and are open for longer hours. MTN moves more money than any other institution. The whole model of Ghanaian banking is changing and those who understand MM will be the ones to benefit.”

Regulation

The MM segment has benefitted from limited regulations, a factor that was also central to its recent flourishing in Kenya, perhaps the best-known MM success story. However, mobile wallets still require the owner to possess a bank account, and the mobile providers must work in partnership with banks. The growing popularity of the segment in rural areas offers ample opportunities for banks to expand their customer base. “Telecoms companies cannot hold deposits, so the success of MM means that banks could collaborate with mobile operators to link accounts to wallets,” Martha Acquaye, head of e-business at CAL Bank, told OBG. While the BoG introduced legislation on MM as recently as 2015, lobbying by telecoms operators and banks – each wanting a greater role in MM – means regulations are open to revision in the coming years.

Outlook

From its earliest days in office, the New Patriotic Party government demonstrated a determination to strengthen and modernise the financial sector through the increased use of capital markets, greater insurance uptake and larger, better-capitalised banks. For 2018, the Ministry of Finance’s main objectives include promotion of access to data and research, increased sector transparency, stronger regulatory capacity, and expanded professional training and financial inclusion programmes.

One of the most significant recent changes, the new minimum capital requirement, will increase credit flow by encouraging small local banks to consolidate, resulting in bigger banks with the capital and capacity needed to clean up loan books and steer more credit to the private sector. This will also lead to institutions able to finance larger and more capital-intensive projects. With Treasury bill yields falling and economic growth on the rise again, this is a timely course of action.