Ghana's banking sector clean-up has created a more sustainable industry

A regulatory crackdown on poor business practices and weak capital positions in Ghana’s banking sector has resulted in a series of market exits since August 2017. The outcome is a smaller but more sustainable banking industry, though this has come at a price. The Bank of Ghana (BoG) puts the total costs of its clean-up operation at some GHS10.98bn ($2.1bn), equivalent to just over 3% of the nation’s GDP in 2019.

Reforms

An asset quality review carried out by the BoG in 2015 and 2016 revealed severe challenges with solvency, liquidity and asset quality in Ghana’s banking industry, with some banks showing significant under-provisioning and capital shortfalls. When the current management of the BoG took office in early 2017, it faced a financial sector it describes as being in a “considerable state of distress”. In response, the authority moved to strengthen the sector in September 2017 with a new minimum capital requirement, in which all universal banks were required to increase their minimum paid-up capital to GHS400m ($77.5m) by December 31, 2018. The result of this regulatory intervention was a number of market exits and mergers, leading to a significantly altered banking landscape. By 2019 the licences of nine banks had been removed by the BoG on the grounds of insolvency. The BoG had also given its approval for three mergers: First Atlantic Merchant Bank with Energy Commercial Bank; Omni Bank with Sahel Sahara Bank; and First National Bank with GHL Bank. Some 16 banks had met the new capital requirement, mainly by securing capital injections or through the capitalisation of surplus income. Five banks secured cash injections from the Ghana Amalgamated Trust (GAT), a group of private pension funds.

The government is also using resources from GAT to recapitalise two state-owned banks, the Agricultural Development Bank and the National Investment Bank. The latter is being restructured through governance and management reforms, and its business model refocused to support the government’s industrialisation policies. Both institutions, therefore, are expected to play important roles in the realisation of the government’s economic strategy (see Economy chapter).

The final outcome of the BoG’s recapitalisation process is an industry made up of a smaller number of well-capitalised banks. “Following the exercise, all the key financial soundness indicators in terms of solvency, liquidity, efficiency and asset quality have improved. The provision of capital buffers by banks under the Basel II and Basel III framework has also ensured that banks are more resilient to shocks,” Ernest Addison, governor of the BoG, told OBG. “Other supervisory and regulatory directives on corporate governance, financial holding companies and voluntary winding up of financial institutions, among others, will further enhance the stability and soundness of the sector.”

A similar clean-up process, which has already resulted in hundreds of licence withdrawals, has also been applied to the microfinance and non-banking financial institutions sector (see analysis).

Sector Structure

Ghana started 2017 with 36 banks, but by 2019 this number had fallen to 23. The BoG’s clean-up of the sector was the primary cause of the market exits, although the 2018 departure of the Bank of Baroda Ghana, a wholly owned subsidiary of the Bank of Baroda India, was the result of the Indian government’s decision to rationalise the overseas operations of Indian public sector banks.

Locally owned Ghana Commercial Bank (GCB) is the market leader in terms of operating assets, posting GHS9.7bn ($1.9bn) at the outset of 2019, according to PwC. GCB controls around 12.1% of the industry’s total operating assets; Togo-headquartered Ecobank controls approximately 12%; and Absa Ghana, which was previously Barclays Bank of Ghana, has 10.9%. These banks make up the top tier of institutions that have double-digit market shares. Five institutions have market shares of between 5% and 9%: locally owned Fidelity Bank (8.3%); Stanbic Bank Ghana (7%), a division of Standard Bank, a member of the Johannesburg-headquartered Standard Bank Group; Standard Chartered Bank (6.9%), the country’s oldest bank, having operated in the territory which constitutes modern Ghana for over 120 years; Zenith Bank Ghana (6.6%), part of the Nigerian-based group that is a major service provider in English-speaking West Africa; and Cal Bank (6%), the locally owned small and medium-sized enterprise specialist. There were also four representative offices of foreign banks: Citibank Ghana; Ghana International Bank; Export-Import Bank of Korea; and Bank of Beirut.

Another change that has emerged since the BoG’s clean-up operation is that the second-largest branch network in the country is now operated by the Consolidated Bank of Ghana, a government-owned institution formed in 2018 to control the assets and liabilities of five distressed institutions: Construction Bank, Beige Bank, Royal Bank, UniBank and Sovereign Bank.

Beyond the Universal

Financing activity in Ghana extends beyond the universal banks that make up the core of the sector to include a large array of other institutions licensed by the BoG. In terms of total assets, the largest of these subsectors is non-bank financial institutions, made up of savings and loans companies, finance houses, mortgage finance companies and leasing companies. Together, they held assets worth GHS11.4bn ($2.2bn) at the outset of 2019, accounting for just over 9% of total banking sector assets.

The second-biggest subsector by assets is made up of 144 rural and community banks (RCBs), which as of end-2018 had a combined asset base of GHS4.1bn ($794.1m). These locally owned and managed institutions first began to enter the market in the 1970s to provide credit to small farmers and businesses within a limited geographic area. RCBs are supervised by the ARB Apex Bank, a clearing bank that acts under supervision of the BoG. Taken together, the 800 RCB branches constitute the biggest branch network in the country. As of October 2019 the number of customers in this network stood at about 7m, more than the total number of customers doing business with universal banks in Ghana. The competitiveness of RCBs was significantly increased in 2017 with the introduction of an ATM network for these institutions.

The microfinance subsector, meanwhile, comprises 484 licensed microfinance companies, 70 money lending companies and 12 financial non-governmental organisations, including both deposit-taking and profit-making institutions. The total assets of the 253 reporting microfinance institutions was GHS999m ($193.5m) as of the end of 2018. Just over 80% of this sum was accounted for by deposit-taking institutions, while assets attributable to non-deposit-taking microfinance institutions accounted for the remainder.

Regulation

The BoG has supervised the banking industry since its establishment in 1957, a few days before the country gained its independence. Until recently, it controlled the sector according to the Banking Act 2004. However, as part of its reform effort, the BoG introduced the Banks and Specialised Deposit-Taking Institutions Act 2016 as the primary statute by which the sector is supervised. The new legislation grants the BoG more supervisory power and brings all deposit-taking entities, including non-bank financial institutions, under one law. It also establishes more stringent criteria for licensing and mergers, and enables the regulator to supervise banking groups and financial holding companies in a consolidated way.

The most significant regulatory response to the sector’s stability challenge is a change to the amount of capital banks are required to maintain in order to retain their licences. Ghana’s banks were given until December 2018 to meet a new minimum capital requirement of GHS400m ($77.5m), up from GHS120m ($23.2m). The BoG’s Capital Requirement Directive (CRD) also establishes tougher capital standards through more restrictive capital definitions, as well as higher liquidity standards that may compel banks to adjust their balance sheet strategies in order to minimise illiquid assets. In terms of processes, the CRD requires banks to enhance their capacity in key areas such as stress testing and counterparty risk. More than four out of every five bank executives interviewed by PwC in its 2019 banking survey identified the CRD as one of the top-three reforms having the biggest impact on their banking business. The same survey found that a number of bank executives believed that the new capital requirement has helped to level the playing field, allowing domestic institutions to partake in bigger-ticket transactions that were not previously possible or were limited to a few international banks.

The BoG issued its new corporate governance directive in February 2018, aimed at ensuring the sustainability of the reformed sector, as well as boosting public confidence in it. The directive establishes criteria for key management personnel and gives the BoG power over their appointment. It also clearly lays out the duties of the boards of directors, and requires that at least 30% of the board of a financial institution is Ghanaian. While the new measures have been broadly welcomed, some in the industry are concerned by the level of interference that they entail. For example, some banks have argued that the demand that the tenure of non-executive directors and board chairpersons be limited to 12 years and nine years, respectively, could cause unnecessary difficulties, as some individuals have valuable sets of skills, making securing a replacement a costly and time-consuming undertaking.

The legislative and regulatory framework that supports the banking industry has been considerably enhanced by changes made over recent years. Areas of vulnerability, however, remain: a 2018 report by Barclays Africa characterised the framework as having a low recovery rate and high costs. According to the report, the average payment recovery rate stood at 23 cents to the dollar, 12 cents lower than that of South Africa.

Performance

Despite a challenging economic and regulatory backdrop, Ghana’s banks have exhibited steady growth in operating assets in recent years. The total assets of the sector stood at GHS34.2bn ($6.6bn) in 2013, according to PwC. Since then, the industry has posted successive annual gains to push total assets to GHS80.6bn ($15.6bn) at the end of 2018. The sector as a whole remained profitable during this period. According to PwC, the sector’s aggregate profit before tax grew by roughly 10% in 2018, from GHS3.3bn ($639.2m) to GHS3.7bn ($716.7m), a slower pace of growth than the 31% expansion achieved the previous year. This result is partly explained by the 2018 implementation of the International Financial Reporting Standard 9, which requires banks to anticipate future losses and make provisions for them. While net interest income declined across the sector, fees and commission income expanded by 11%, continuing a recent growth trajectory that has been powered by the government’s drive towards a cashless economy and the concomitant increase in card-based transactions.

Some performance metrics, however, have shown less positive trends. Most notably, a slowdown in deposit growth from an average of 20% between 2014 and 2016 to 6% over 2017 and 2018. This was largely the result of concerns regarding the stability of the sector, as the BoG’s investigation of the sector uncovered a series of industry weaknesses.

Loan growth has also shown an uneven performance. In 2015 the banking sector’s aggregate lending almost doubled from GHS17bn ($3.3bn) to GHS30bn ($5.8bn), according to data from the BoG. However, an economic slowdown in 2016 resulted in a reduction of lending activity, as banks sought to limit the potential for non-performing loans (NPLs) by investing in risk-free government securities rather than advancing credit to customers. Lending activity showed a negative trend in 2017, and in both 2017 and 2018 banks’ continued investment in securities disrupted the usual pattern by which loans and advances drive asset growth. However, in 2018 lending activity returned to a positive trajectory, with an 8% expansion of net loans and advances for the year. Growth was primarily driven by an increase in credit directed to the mining sector, which grew by 46.6%, while agriculture rose by 8.6%.

Lending Rates

Elevated lending rates are a frequent complaint among the business community, often cited as a block to private investment and economic growth in Ghana. Since the implementation of the Ghana reference rate (GRR) in 2018, banks in Ghana have been using it as a key benchmark by which to price their loans, adding a customer-specific premium to the metric in order to establish a lending rate. Three parameters feed into the GRR: the BoG’s monetary policy rate; the interbank rate, at which banks lend to each other; and the 91-day Treasury bill. In practice, the GRR closely shadows the BoG’s monetary policy rate, which since 2017 has been declining as the central bank has responded to an improving inflation environment. The BoG gradually lowered its monetary policy rate from 21.5% in mid-2017 to 16% in January 2019 – its lowest level since 2013. Mirroring this movement, in July 2019 the GRR stood at 16.16%, according to BoG data. The central bank’s monetary policy rate easing, and the effect this has had on the GRR, has allowed Ghana’s banks to lower their lending rates: the average commercial bank lending rate between June 2018 and June 2019 was 27.47%, which compares favourably to an average rate of 28.42% between June 2012 and May 2018. While this was a welcome development, the decline was a modest one, demonstrating the stickiness of banks’ lending rates in comparison to the more rapidly declining monetary policy rate and the GRR.

The problem lies in the risk premium added by the banks to the GRR, which has remained elevated due to banks’ concerns regarding high level of NPLs. Between June 2012 and May 2018 NPLs remained stubbornly close to 15% – significantly above the European average of around 3.4% in 2018, and higher than the level found in challenging lending environments such as Guinea (12.2%), Afghanistan (8.9%) and Lesotho (3.7%). By May 2018 the NPL ratio had risen even higher to 22.8%. In effect, Ghana’s banks are managing the cost of the NPLs by adding a high risk premium to customer loans. This means that, despite the falling GRR, lending rates offered by commercial banks are likely to remain relatively high for borrowers.

Asset Quality

Improving the aggregate asset quality of the Ghanaian banking sector is therefore a strategic priority of the central bank. According to the regulator, the sector’s aggregate NPLs declined by approximately 15.5% from GHS8.53bn ($1.7bn) in May 2018 to GHS6.83bn ($1.3bn) at the close of July 2019. This translated to a reduction in the sector’s NPL ratio from 22.8% to 17.8%. Although this is an improvement, the BoG considers the current rate to be too high, and has recommended banks adopt a number of policies to reduce it, such as tightening risk-management practices and writing off bad loans, including the legacy debt that was generated by the most recent energy crisis (see Energy chapter). The BoG is also taking steps to improve the soft infrastructure around credit administration, by developing new regulations to support the Credit Reporting Act 2007, formulating the new Borrowers and Lenders Bill in order to address weaknesses in the existing Borrowers and Lenders Act 2008, and implementing new legislation aimed at providing more channels for payments and settlements.

Fintech

Technology will play a central role in opening new channels between banks and their customers. The most significant tech trend in recent years has been a reduction in internet banking as more customers switch to a rapidly expanding array of mobile banking options. According to the BoG, the number of registered internet banking customers declined by 12% in 2018, from 936,965 to 815,904. The World Bank’s most recent Global Findex Database similarly found that of the nearly 60% of Ghanaians with bank accounts in 2017, approximately 40% had mobile money accounts.

Telecoms companies have spearheaded the move into the informal sector, developing the necessary technology platforms and front-end products, establishing agent networks and funding the large advertising campaigns necessary to attract the large volume of customers required to turn a profit in this low-margin segment. The three mobile money pioneers in Ghana – Airtel Money, MTN Mobile Money and Tigo Cash – each partnered with between three and 10 banks to roll out their services. To date, the role of banking institutions in these arrangements has been limited to holding funds in a pooled account, taking legal responsibility for agents and know-your-customer requirements, and providing support to agents in liquidity management. A regulatory demand that mobile money operators partner with at least three institutions has acted as a disincentive for banks to invest further in the segment, due to concerns that their investment would be facilitating the operations of rivals.

More recently, however, banks have started to adopt a more proactive stance, moving into underbanked segments by partnering with financial technology (fintech) companies to create their own financial products. The new Payments Systems and Services Act, which was passed in March 2019, will make it easier for fintech companies to collaborate with both the banking and insurance sectors, as well as blur the lines between traditional banking activities and the new business models of non-bank institutions.

Mobile Money

Improvements to the technical framework underpinning mobile money are also helping to drive its expansion. In 2018 the BoG launched its Mobile Money Interoperability Project, connecting mobile money platforms with the National Switch and Biometric Smart Card Payment System. This has enabled customers to transfer mobile money across networks, and between their mobile money wallets and their bank accounts. According to the BoG, the number of registered mobile money accounts increased to 32.6m as of the end of 2018, compared to 23.9m a year earlier and 7.2m in 2014. In the long run, this represents an opportunity for banks in terms of credit expansion. For example, the transparent financial histories of small businesses using cashless transactions will allow banks to more easily extend credit to them.

Outlook

Banking penetration in Ghana is rising, with the World Bank’s Global Findex Database noting that account ownership in Ghana doubled between 2011 and 2017, with nearly 60% of adults holding at least one. If this trend is to be maintained, however, the industry must recover the confidence it has lost.

The central bank’s reform effort means that the country’s banks will have greater capacity to respond to rising demand from the private sector, thanks to larger capital bases and improved corporate governance structures. Demand for credit is likely to be driven by growing sectors such as manufacturing and mining, as well as the government’s need for debt financing in order to cover its fiscal deficit. In the retail banking segment, the authorities’ ongoing financial inclusion drive and the expansion of mobile and internet banking are likely to boost credit growth.

The BoG claims that its clean-up of the banking sector saved 70% of potential job losses and GHS1.5bn ($290.6m) in customer deposits. More reforms to the sector are therefore planned for the short term, including new directives and regulations aimed at tightening the credit framework, boosting the BoG’s regulatory and supervisory capacity, strengthening the crisis-management framework and fully implementing Ghana’s deposit insurance legislation.

Looking to the lending rate, the World Bank anticipates that inflation will remain within the central bank’s target range of 6-10% over the medium term. This suggests that the central bank will be able to cut its monetary policy rate again in 2020, a possibility it hinted at when it made its 2019 cut that brought the policy rate to a five-year low of 16%. Combined with the BoG’s efforts to improve asset quality, this could help to lower the aggregate lending rate of commercial banks. However, monetary policy decisions will also have to take into account the weakness of the cedi, which has declined in value against the US dollar since 2018 due to a combination of different factors, such as a stubborn trade deficit and increasing aversion to emerging market risk exposure (see Economy chapter).