Most fundamentals remain healthy but challenges do exist

For a frontier market, Ghana’s banking system is very developed. It is well capitalised, the non-performing loan (NPL) ratio has been declining for a number of years, and regulators are continually pushing to ensure the sector is both sound and inclusive. The main urban centres are well banked, and rural parts of the country are served by a wide range of specialist institutions. In addition, the payments system is robust, with facilities for real-time settlement, interoperability, fast cheque clearing, instant transfers and high-tech, chip-based products. Ongoing reforms, such as one targeting the pension fund market, will help open new opportunities.

Though most of the fundamentals are healthy, there are still a number of challenges that limit overall efficiency and performance. The sector remains unusually fragmented, as consolidation that could eventually result in much larger institutions is happening slowly or not at all. On the other end of the spectrum, despite the existence of specialist rural banks and non-bank financial institutions (NBFIs), much of the country remains unbanked (see analysis). Ghana’s banks are also being tested and taxed by the nation’s current macroeconomic troubles, including a weak government balance sheet.

Storied History

Banking in Ghana goes back to the late 19th century. In 1896 a branch of the Bank of British West Africa, which had been founded with offices in the UK and Nigeria two years earlier, was opened in Accra. Two decades later, in 1918, the Colonial Bank began operations in the country. These two foreign-owned banks dominated the sector through the 1950s. But after the creation of the Bank of the Gold Coast in 1953, the government began to play a major role in the sector. All local banks were at least majority-owned by the state, and in the 1970s even foreign banks were required to sell minority stakes (40%) to the government.

By the late 1970s, the country’s banks were under extreme stress as a result of inflation, low capital, bad loans and currency devaluation. A number of measures were taken to stabilise the economy but, due to lack of confidence in the system and negative real deposit rates, bank deposits fell from 19.5% of GDP in 1977 to 7.4% in 1984.

The country finally embarked on its IMF-backed Economic Recovery Programme in the 1980s. Interest rates were liberalised in 1987 and sectoral credit ceilings were abandoned in 1988. Bad assets were moved in 1991 to the Non-Performing Assets Recovery Trust and public sector banks were recapitalised. In 1989 Ghana passed a new banking law, which defined capital adequacy, set out reporting requirements and established lending guidelines. In 1993 the country passed a financial institutions ( non-banking) law, which covered everything from discount companies to hire-purchase firms.

Open Market

The sector has expanded rapidly over the past 20 years, and a number of new banks have been licensed. Six domestic banks were established in that time, while in the 1990s several foreign entrants moved in, including Togo’s Ecobank, Mali’s Amalgamated Bank, South Africa’s Stanbic and France’s Société Générale, followed by a wave of Nigerian banks after 2000.

In 1986 the country had 11 banks, four of which had foreign equity participation. It now has 27, according to data from the Bank of Ghana (BoG), with the most recent entrant, locally owned First Capital Plus, having been established in 2013. Of the total, 12 are local and 15 are foreign.

Regulatory Framework

Since the turn of the millennium, Ghana has undertaken steady reform and liberalisation. The Bank of Ghana Act, passed in 2002, established a modern framework for the operations of the central bank. Among other responsibilities, the BoG was tasked with: setting monetary policy, keeping the currency stable, managing and regulating payments systems, maintaining a healthy balance of payments and supervising NBFIs as well as rural and community banks (RCBs), microfinance susu collections, a form of smallscale deposit-and-loan activity.

In 2003 a universal banking licence was made available to banks with capital of more than GHS70bn ($2.7m) in pre-redenominated cedis, while a new Banking Act in 2004 outlined rules for supervision, control, ownership and liquidity. Amendments to that act in 2007 established three classes of licences for banking: class I, which allows the holder to undertake domestic business; class II, which permits offshore banking; and class III, which allows for both. In 2007 the cedi was redenominated, shaving four zeros off of the local currency.

After redenomination, the minimum required capital was increased from GHS7m ($2.7m) to GHS60m ($22.9m), though implementation took a few years. Foreign banks were given until the end of 2009 to hit that level; local banks had to reach it by end-2012, with an intermediary goal of GHS25m ($9.5m) in 2010. By the target date, all banks operating in Ghana had met the minimum capital threshold.

New universal banks are required to have GHS120m ($45.7m), and in 2013 the central bank discussed making this a requirement for all commercial banks in the country. As a result of these measures, the sector’s capitalisation has grown quickly. At the end of 2013, paid-up capital for deposit money banks (DMBs) was GHS2.35bn ($895.8m), up from GHS2.17bn ($826.4m) a year earlier, while paid-up capital for all banks reached GHS2.9bn ($1.1bn), according to the BoG’s 2013 annual report. The sector is also hitting the required ratios: capital adequacy at the end of 2013 was 18.5%, according to the central bank – well above the 10% minimum.

Credit Bureaux

Ghana has three credit bureaux: XDS Data Ghana, HudsonPrice Data Solutions and Dun & Bradstreet. XDS was the first to be fully licensed in the country, in 2010, and banks were required to submit their data to it. In 2013 NBFIs were also instructed to provide information to the bureaux and, that same year, RCBs began using the credit bureaux data to make lending decisions. The number of credit checks in 2013 rose 156.6% on the previous year, according to BoG data.

The central bank has been particularly concerned about borrowers accessing credit from one institution in order to service a loan provided by another. Proper reporting should make this practice more difficult. The standard format for credit reporting data for an individual includes address, occupation, salary, national ID, voter ID, overdue loans arranged according to the number of days late, and details about the guarantors. “The work of the credit bureaux in Ghana is a very positive development for the microfinance industry, which lends to smaller and less-well-known companies.” Selasie Woanyah, managing director of Diamond Capital, told OBG. “However, the system is only as good as the information submitted to the bureaux. All lenders must play their part and submit updated information to the authorities.” Indeed, “data integrity in Ghana’s financial sector must improve before financial institutions can truly rely on credit reports,” Kwasi Tumi, managing director of City Investment Company, told OBG.

Indicators

Overall, the market is quite healthy. According to the BoG 2013 annual report, return on equity in the sector increased from 20.4% in 2010 to 30.9% in 2013, while return on assets climbed from 3.8% to 6.2%. The NPL ratio dropped from 13.2% in 2012 to 12.0% in 2013, which was a decline from 16.3% in 2004. According to Ecobank, the true figure is even lower, as BoG rules do not allow banks to net out loans that have been offset with provisions. During the banking crisis of the 1980s approximately 41% of loans were non-performing.

In the first half of 2014, the country’s seven listed banks announced record profits. Earnings before tax jumped 49% year-on-year (y-o-y). The IMF has noted a decreasing concentration in the banking sector, with the market share of the five largest banks dropping from 61% in 2005 to 46% at the end of 2010. As competition increased over time in the sector, service greatly improved, according to research from the Kwame Nkrumah University of Science and Technology. Working hours have been extended, the use of technology has increased, and waiting times for loan approvals have shortened from four months to 48 hours.

Major Players

Foreign banks control about half of the sector in terms of total assets. Togo-headquartered Ecobank is ranked first, with total assets of GHS4.6bn ($1.8bn), according to its 2013 annual report, and hit GHS5.6bn ($2.1bn) in the first half of 2014. Second is the Ghana Commercial Bank with GHS3.4bn ($1.3bn) in assets, which grew from the pre-independence Gold Coast Bank and is 51.17% owned by the Ministry of Finance and the Social Security and National Insurance Trust (SSNIT). Standard Chartered Bank Ghana is third, with GHS3.14bn ($1.2bn) in assets as of the second half of 2014, and Stanbic Bank came in fourth, bumping Barclays Bank Ghana down to fifth from the previous year.

Others rounding out the top 10 are the Agricultural Development Bank of Ghana (ADB), which is government-owned but preparing to list its shares in the first quarter of 2015, according to press reports; Fidelity Bank, which is owned by local and international investors, with the largest share (31.09%) held by Africa Capital; and Cal Bank, which is publicly listed but with a large share owned by SSNIT. Two new entrants to the top 10 in 2014 are Nigeria’s Zenith Bank and United Bank of Africa.

In 2013 the total number of banks in Ghana rose from 26 to 27, as First Capital Plus upgraded from being a savings and loans company to a full commercial bank. Seven of these are listed on the Ghana Stock Exchange, including CAL Bank, Ecobank Ghana, Ghana Commercial Bank, HFC Bank, Standard Chartered, Société Générale and UT Bank.

Non-Commercial

Outside of commercial banks, the country has a large universe of financial actors: 140 RCBs, four of which were added in 2013, and 57 NBFIs, up from 52 in 2012. Of the NBFIs, 31 are finance companies, 23 are savings and loans, two are leasing companies and one is a mortgage firm.

Rural banks were first established in Ghana in 1976 to provide credit to small-scale farmers and rural enterprises. They offer a wide range of basic financial products but are limited to working within a 40-km radius of their branch and are subject to regulation by the ARB Apex bank. RCBs have had a minimum capital requirement of GHS150,000 ($77,115), although that is being doubled to GHS300,000 ($154,230), and are permitted to operate in only one of the country’s administrative regions. Estimates of customer volumes for the RCB sector hover between 4m and 5m customers, the vast majority of them in the south – Ghana’s northern regions host less than one-fifth of its RCBs.

The 23 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). “NBFIs are of a size and structure that allows them to operate quickly, flexibly and with tight control over internal risk,” Emmanuel Obeng, CEO of Jislah Financial Services, told OBG. “This is particularly important for short-term financing when loans are needed more urgently.”

Given the country’s large informal market, the size of its unbanked population and the challenge of drawing new lower-income customers into the formal arena of services, microfinance is taking off. The segment is building in part on Ghana’s long tradition of small-scale lending, rural banks and susu informal lending, which has already helped expand basic services among the broader population. Currently, the BoG, which regulates the sector under a 2012 framework, has issued licences for 390 institutions, mostly in rural areas (see analysis).

As in many emerging markets, the country's leasing segment is still fairly limited, due in part to a lack of familiarity with leasing options among the public. Nevertheless, 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.

Many of these non-banking institutions are considering an upgrade. GN Bank, formerly First National Savings and Loan, for example, has recently begun operating as a universal commercial bank. According to Issah Adam, the bank’s general manager of finance and administration, there are many advantages to being a fully fledged DMB. Commercial banks are able to clear their own cheques, whereas a savings and loans company must do so through another commercial bank. They can also have a direct account with the central bank and engage in foreign-trade-related financing. According to Adam, the bank now has more than GHS60m ($22.9m) in capital, though there has been some concern in the sector that banks jumping to full bank status will be required to meet the GHS120m ($45.7m) minimum.

Consolidation Possible

Even as NBFIs gradually transform into new banks, the sector overall is poised for consolidation. The sense is that, for a country of 25m, Ghana’s banking sector is simply overcrowded and would do better if the total number were reduced. “Clearly, there are too many banks,” Sulemana Mohammed, financials research specialist at Ecobank Development Corporation, told OBG. “Nigeria has a bigger economy but fewer banks.”

A handful of transactions to this effect have occurred in recent years. In early 2012 Ecobank acquired The Trust Bank (TTB) in a share-swap transaction. TTB, which had a strong profile in the small and medium-sized enterprises and local corporate business segments, had been majority-owned by SSNIT before the merger with Ecobank. In two other recent mergers, Access Bank finalised its acquisition of Intercontinental Bank in 2012, and Bank of Africa acquired Amalgamated Bank in 2011.

There is scope for more mergers but little urgency. One reason for this is that the sector has seen strong performance, and hence most institutions are not in dire need of capital. “Minimum capital is not a reason to merge,” said Mohammed. “If they raise it on their own, there’s no reason to merge.”

In recent years, a number of mergers have been discussed by various institutions and in the press, but most have failed to materialise. HFC itself was the subject of an attempted takeover by Republic Bank of Trinidad and Tobago. In December 2012 Republic bought 8.79% of the Ghanaian institution, later purchasing an additional 23.23% in June 2013 and another 7.98% in September 2013. When it tried to acquire the rest of the firm, however, it was sued by the bank, and as of late 2014 the deal was still being dealt with by the courts. Stanbic, meanwhile, tried for a number of years to acquire ADB, but nothing concrete has come of its efforts.

Deal Size Limits

Though few deals have been completed, there is at least one good commercial reason for them ultimately to be accomplished. Because of a combination of single-borrower limits and low capitalisation in absolute terms, local banks have difficulty in supporting larger projects, especially those related to oil, gas, technology and the financing of cocoa purchases by the Cocoa Board.

In Ghana, central bank rules limit loans to any one borrower (or in any single transaction) to 25% of shareholder funds. While the minimum capital requirement of GHS60m ($22.9m) is enough to keep the banks solvent, this rule puts a low ceiling on the size of the deals they can do. The central bank also raised the reserve ratio from 9% to 11% in April 2014, which has further limited the ability of local banks to participate in large transactions. “With their limited capital base, how large of a deal can they do?” said John Bour, head of wholesale banking at Bank of Africa, Ghana. “They might find it difficult, if not impossible, to finance an oil rig.”

By contrast, foreign banks that are active in Ghana have found it easy to meet the higher capital levels that larger deals require. Connected as they are to their broader, global networks, these banks have wider access to capital from their parent companies.

To address this, the sector is shifting towards an increase in syndicated loan activity – among both domestic and foreign institutions. In 2012, for example, local banks raised a total of GHS410m ($156.3m) in a syndicated transaction for MTN Ghana, the country’s leading mobile operator. Stanbic, for its part, led a group of 16 banks in the deal, while another $60m was raised from foreign banks.

Despite this increase in syndicated activity, industry executives say Ghana’s banks see themselves at a distinct disadvantage in building their loan books. They fear that foreign institutions, with their deeper pockets and broader networks, will continue to get most of the best business. They are also concerned that, in order to stay competitive, they will be forced to accept mergers or takeovers. In comments to the local press in early 2014, the CEO of Ecobank Group, Albert Essien, said he felt that Ghana’s banks should consolidate to do multibillion-dollar transactions, pointing to Nigerian banks as an example. Even with syndication, however, deals of such a size would not be possible in Ghana.

Raising Capital

Indications from the BoG are that it will not require the local banks to further increase their capital, but will encourage them to do so, so that they can take part in larger transactions. In late 2013 Millison Narh, the BoG’s first deputy governor, told the local press that the central bank would not issue any more directives on capital.

Some banks have voluntarily lifted their capital well above the required threshold. Cal Bank is now at GHS100m ($38.1m), following a GHS75m ($28.6m) private placement in 2012. Also in 2012, UT Bank raised $15m from a German investment group, taking its capital to GHS84m ($32m). Royal Bank said in early 2014 that it was looking to increase its capital to enable it to engage in larger projects. It already has some GHS100m ($38.1m), but believes that more would give it a better edge. The two strongest banks by total capital are Ecobank with GHS227m ($86.5m) and Access Bank with GHS118m ($45m), followed by Cal Bank, Royal Bank and UT Bank.

Concerns Noted

While the sector is in good general health, some specific concerns have been noted. In an assessment update on the stability of the country’s financial system, the IMF identified a number of issues. It said, for example, that the sector remains unusually dominated by state banks, with the highest ratio in sub-Saharan Africa for government control over the deposit base. The fund added that such a scenario leads to an overly strong correlation between bank risk and sovereign risk, especially if the government uses the banking system it controls to support extra spending. The country’s state banks may also find themselves in time facing arrears from government borrowers, which could potentially lead to high levels of NPLs. Conversely, state-controlled banks represent additional contingent liabilities for the government.

Other possible areas of vulnerability include risks from related parties, risks resulting from weak credit management and concentration risk, as some banks focus on loans to certain conglomerates and their employees, according to the IMF. Loans that carry an implicit guarantee from the government, the fund notes, have lower levels of security, and internal controls on this are poor. The IMF adds that some loans are being misclassified and that some of these may be under-provisioned. The central bank, though nominally independent, can have its decisions vetoed by the government, raising the possibility of excessively pro-cyclical monetary policy.

The Macro View

The short-term macroeconomic outlook is making the environment particularly challenging for the banks (see Economy chapter). Inflation, currency depreciation and worsening business conditions are all starting to take a toll on activity. According to a survey conducted by PwC in 2014 on Ghana’s banking industry, early signs suggest that growth in profitability may slow in 2014. While profits in early 2014 were growing overall, local press reports suggest that the average retail bank customer is taking out more money than he is putting in, making withdrawals for necessities but not earning enough to make deposits after expenses are covered.

Financial Inclusion

The strong fundamentals of the banking sector do not necessarily translate to a comparably strong level of financial inclusion, particularly in terms of lending to smaller clients. While the larger banks regularly and aggressively battle it out for urban retail and large corporate customers, rural and small-scale customers are not a major focus for most institutions.

At the same time, according to Felix Nyarko-Pong, CEO of uniBank, “SMEs do not have the capacity to be as resilient to system shocks, which can whittle down the competitiveness of the firm and increase the need for access to finance.”

The IMF estimates that only 30% of the country’s population has a formal financial account. Part of the reason for this is that the government is selling Treasury bills with high yields to finance its budget deficit. In August 2014, the 91-day bill was quoted at 26.25%. For banks, such high risk-free rates are more attractive than chasing retail lending, especially when three-month deposits are paying only just over 10% while inflation is running at around 15%.

In such conditions, private borrowers have a hard time competing with the government for available funds, and find it challenging to pay off loans. In March 2014, the average loan rate in Ghana was above 25%, according to the central bank, which is at the high end of comparable rates in neighbouring West African economies. In Nigeria, for example, the average lending rate falls in the low-to-mid teens for non-blue-chip corporates. The high rate in Ghana is not only a result of the competition for credit that is created by the public sector, it is also due to high administrative overheads and operational costs, as well as elevated NPL rates.

Like many African frontier markets, Ghana’s economy is predominantly cash-based, which only adds to other constraints on participation in formal banking – although susu collectors often provide limited financial services to the unbanked (see analysis). Ghana is a lower middle-income country with a per-capita GDP of $1850 and a minimum wage of GHS6 ($2.30) per day. As much of the economy is informal, for most banks it does not pay to service small accounts with a high number of transactions. “You can’t go to the village and expect to make a significant profit,” said Bour of Bank of Africa, Ghana. “In the cities, the informal sector is largely left out by the universal banks as they do not find the sector attractive. The formal sector is where all the banks are scrambling for market share.”

Payments Systems

Ghana’s banking sector is particularly strong in terms of payments systems, and has been so for some time. In 1997 a magnetic ink character reading (MICR Code) system was introduced, which eased the processing of cheques. The country has had real time gross settlements (RTGS) capability – called the Ghana Interbank Settlement system – which speeds up transaction processing, since 2002, before Kenya or Nigeria did.

In 2003 the Payment Systems Act was passed, giving the central bank full authority over payments systems. Currently all commercial banks, the BoG and the ARB Apex Bank (which serves as the central bank for RCBs) are all on the RTGS system, as are SSNIT and a number of other major non-banks.

The cheque codeline clearing system became operational in 2010, reducing the time for cheque clearing to two days. Under the previous system, which was part automated and part manual, it could take three or four days for cheques to clear in Accra and Tema, and up to two weeks elsewhere. The Ghana Automated Clearing House (GACH) was introduced in 2011, allowing for chequeless electronic transfer of funds between accounts. The following year, a programme called gh-link went live, enabling ATM cards from one participating bank to be used at ATMs of a different participating bank.

The Ghana Interbank Payment and Settlement Systems (GhIPSS), which handles payments and interoperability platforms, has also introduced a product called e-zwich. This is a bank-independent smart card that allows customers to conduct transactions at any participating institution, and can be used both online and offline and at ATMs and point-of-sale (POS) locations. GhIPSS is now pushing more banks and their branches to accept e-zwich cards and offer relevant services, and is also working to encourage more hybrid ATM and POS machines, which accept both bank cards and e-zwich cards (the latter need a fingerprint reader). “The take-off of the e-zwich card has faced some challenges. Financial institutions have so far been reluctant to promote this payment card,” Prince Kofi Amoabeng, CEO of UT Bank, told OBG. “There is a role for the central bank to play in driving the growth of this initiative.”

In 2014 GhIPSS began introducing instant third-party payments. Under the GACH system, payment processing could take at least three hours and up to 24. The new system does this immediately.

Ghana has thus put all the basic pieces in place for a comprehensive and robust payment system. A few gaps, however, still exist. Foreign credit cards, for example, are being used for domestic payments via international networks, and the BoG is now seeking to move these transactions onshore. Similarly, while some international banks do offer alternatives, many banks still rely for cross-border transactions on SWIFT and Western Union, or on a number of other international transfer services. Most regional economies already have RTGS in place, but the ECOWAS Payment and Settlement System, while much discussed, has yet to be realised.

Cash-Light

There is a growing sense that goals for domestic payments should be realistic about what can and should be accomplished. While becoming a cashless society is an important goal for many economies, this may not be practical in Ghana or indeed anywhere. As it stands, the current system can provide electronic services for those who want and need them, but also allows those who are either uninterested in such services or not yet ready for them to pay their bills and conduct business. Like many countries, Ghana is arriving at a solution in between. “I don’t see Ghana becoming totally cashless,” said Mary Dei Sarpong, head of business development at GhIPSS. “I see it becoming cash-light.”

Central to realising this vision is to provide alternative means of access for the unbanked population. Fewer than 30% of Ghanaians currently have a bank account, and as mobile banking and microfinance have taken off in other African markets, such as Kenya, providers are looking to bring about the same thing in Ghana (see analysis). Mobile financial services have now been cleared by the authorities, enabling customers to make deposits, pay bills, transfer funds and check their balances through four providers: Airtel, eTranzact, Tigo and MTN. Airtel has partnered with seven universal banks to provide online money services; third-party provider eTranzact, based in Nigeria, operates through 13 banks and NBFIs; MTN works in partnership with 11 highstreet banks; and Tigo is partnered with three banks for its Tigo Cash mobile wallet. These mobile services have seen rapid growth in the past two years.

Call Of Custody

One significant opportunity for banks lies in custodian banking. While this practice of looking after a client’s assets has been an element of banking in Ghana for a number of years, and is now dominated by Standard Chartered and Stanbic, it is a sub-sector set to thrive. Pension fund reform has brought a privately managed second tier to the country, and this tier – which will take 5% of wages – will require custodian banks. “With the growth of the pension sector, there will be an opportunity for banks in custody,” said Ecobank’s Mohammed.

At least 15 institutions have signed up with the National Pensions Regulatory Authority to be custodians, and it is expected that some of these will get quite a lot of business. This is significant not only for the volume of potential business but also for the type of income it will generate. As its revenue is based on fees, custodian banking can balance out banks’ interest income and provide a hedge against tight margins and rate risk.

Some concerns remain. Many of the banks signing up to be custodians have no experience in the sector and may be underestimating the complexity and cost of providing these services, particularly given the level of competition. But the potential for custody to be a significant line of business, at least for some of the stronger institutions, is clear.

Opportunities

Other sectors also present growth opportunities. “Ghana’s power sector first became attractive to the banking community when it deregulated 15 years ago and opened up to the private sector, allowing independent power producers to operate,” Frank Adu Jr, managing director of Cal Bank, told OBG. “This was the real game changer, more so than any recent industry developments.” Robert Kow Bentil, managing director of Royal Bank, said, “Downstream oil and gas represents a strong area for bank financing. In order to get a licence, oil marketers must have upwards of 10 stations, which calls for investment. This is where the banks come in.”

Human Resources

Training and education institutions include the Chartered Institute of Bankers (CIB), whose core activities are training professional bankers for the local industry and conducting professional examinations. The CIB is hoping to expand into the academic arena by offering a BA programme, and later an MA programme, in addition to its already existing professional training opportunities.

Outlook

Over the years, Ghana has built a sound and efficient banking system that is well positioned for the future. As the sector consolidates, banks will get stronger and larger and will be better able to take on larger deals; as regulations are refined, it will be better able to withstand shocks. And while problems of financial inclusion remain, these are not insurmountable: technology and rising incomes will help bring the unbanked population into the formal sector (see analysis). The main challenge at present is effectively to navigate the nation’s short-term macroeconomic difficulties to ensure they do not weaken the sector, given its high rate of exposure.