Despite concerns, Ghana's banking sector is strong and profits are up

Despite the challenges faced in the economy in general – for example, the decline in the currency, the rise in government debt, low commodity prices and a persistent deficit – the Ghanaian banking sector has remained profitable, growing and well capitalised. The country’s lenders have managed not only to survive but also to thrive.

Profit Growth

Net profits in the sector grew 35.5% in 2014 and 60.3% in 2013, according to Bank of Ghana (BoG) statistics, while total assets of the sector grew by 42.2% in 2014 over 2013. Banks in Ghana are also on the whole quite sound. According to the central bank, the adjusted non-performing loan (NPL) ratio was 5.6% at the end of 2014, while the capital adequacy ratio was a solid 17.9%.

“Right now the banks are all sound, liquid, solvent and profitable,” said Stephen Amegashie, director of the governor’s department at the BoG.

Despite the strong results and seemingly sound fundamentals, there are still obstacles to navigate. In recent months, the country has seen a slight uptick in the bad loan ratio, which on an adjusted basis jumped from 4.6% in 2013 to 5.6% in 2014. Asset quality is also at risk of downward pressures, and smaller lenders, such as non-bank financial institutions (NBFIs) and microfinance bodies, face more difficult headwinds. Exogenous pressures, including a slowdown in capital inflows to frontier markets and the worrisome state of government finances, also cloud the outlook. “The NPLs in the non-bank sector in particular are becoming explosive and the BoG has signalled that it may soon review capital requirements for the entire system,” Mahamudu Bawumia, a former central bank governor, said during a speech in early 2015.

As in many frontier markets, the banking sector’s role as a lender and intermediary remains fairly limited in Ghana. With the monetary policy rate at 21%, with government 180-day Treasury bills yielding more than 25% and with some companies struggling to meet their obligations, banks have found government paper attractive at the expense of loans, especially those to small businesses.

Income from loans now accounts for 45.5% of the total, down from 58.7% in 2009, while investment income is at 29.2%, up from 14.3% in 2008, according to the BoG. This has contributed to concerns is that the government – given its need to raise money – is crowding out the real economy by sourcing debt on the local market. Bankers confirm that they really have no other choice than to buy sovereign bills rather than going to the trouble of lending money. “Why should I lend at 26-28% and carry all the risk of the customer?” asks John Bour, head of wholesale banking at Bank of Africa.

Open Sector

Ghana’s banking sector is highly competitive and open, if crowded. According to the BoG’s 2014 annual report, the country has 28 deposit money banks (DMBs), comprising 13 Ghanaian-owned banks and 15 foreign-owned banks; 60 NBFIs; 138 rural and community banks (RCBs); and 503 microfinance institutions.

Over time, it has become more competitive, with concentration actually decreasing. The market share of the top five banks was 39.2% as of the end of 2014, down from 57.4% in 2006 and 77.6% in 2000, according to the BoG. That compares well with Nigeria and South Africa, where the top five banks control more than 60% and 80% of the market, respectively. The biggest banks are also doing impressively well in terms of profitability. Ecobank, Ghana’s largest bank in terms of assets, reported a 70% jump in profits in 2014. Ghana Commercial Bank, the second largest, experienced a 23% rise.

At the same time, intermediation metrics have steadily increased. Assets to GDP rose from 28% in 2006 to 44.8% in 2014, while private sector credit to GDP jumped from 11% to 19% over that time.

The country still has many state-linked banks, and the Social Security and National Insurance Trust (SSNIT) is a major player in the sector. The fund owns stakes in as many as 11 institutions, and some of its holdings are quite sizeable. It owns 5.2% of Ecobank, 29.81% of Ghana Commercial Bank, 14.34% of Standard Chartered, 33.18% of CAL Bank and 22.14% of Société Générale Ghana. The social security fund justifies its large and wide holdings in the financial sector on the grounds that the shares generate good profits, the companies are stable and, most off all, the shares of the publicly traded banks are far more liquid than other shares.

Foreign Factors

Banking is open to international participation, with few restrictions on applying for licences or acquiring local institutions, although actually being granted a licence does come with some closely watched conditions. Foreign entrants must ensure a viable proposal and, if approved, must bring in 60% of their initial capital in foreign, convertible currency. Shareholders and directors must pass a fit and proper test, while KPMG in its 2012 “Doing Business in Ghana” report points out that the regulators limit new foreign entrants to those it deems truly international in nature. Foreign banks have also been required to hit minimum capital requirements earlier than their local counterparts; the GHS60m ($16.7m) minimum deadline was 2009 instead of 2012. This said, the conditions are far from burdensome.

Foreign banks have been active in the country for more than a century. Bank of British West Africa (BBWA), eventually acquired by Standard Chartered, began operating in Ghana in 1899. Colonial Bank, eventually purchased by Barclays, came to the country in 1918.

Although the 1970s saw a number of restrictions in foreign investment, subsequent waves of liberalisation from the 1980s onwards has led to an ever-greater number of foreign participants. Togo’s Ecobank was the next foreign bank to enter, in 1990. It was followed by banks from Pakistan (Bank of Credit and Commerce International), Malaysia (International Commercial Bank), South Africa (Stanbic), France (Société Générale acquired the Social Security Bank in 1995) and, more recently, a round of banks from Nigeria (United Bank for Africa, Zenith Bank, Guaranty Trust Bank, Intercontinental Bank, Access Bank and Energy Bank). One Indian bank, Bank of Baroda, and one Libyan bank, Sahel Sahara Bank, were also licensed, while Citibank from the US has a representative office.

Foreign banks now control more than half the banking industry both in terms of the number of institutions – 15 of the 28 DMBs are foreign-owned – and total assets. The largest institution in the country in terms of assets, Ecobank, is foreign, and four of the five largest banks are foreign: Ecobank, Standard Chartered, Stanbic and Barclays. Ghana Commercial Bank is the largest of the local institutions, coming in number two in terms of assets.

New Entrants

In early 2015 South Africa’s First Rand received the necessary approval to begin operations in Ghana, and as of August 2015 the bank was expected to be up and running soon. In 2013 the bank initially tried to acquire Universal Merchant Bank. However, the offer was rejected by SSNIT, the majority shareholder, and it opted to acquire its own licence.

According to local press statements, First Rand’s plan is aggressive, and the lender will provide a full complement of products. The bank is South Africa’s largest (and also the largest in Africa by market capitalisation, though Standard Bank has a larger footprint). It currently also has operations in Namibia, Botswana, Swaziland, Lesotho, Nigeria, Zambia, Tanzania and Mozambique.

In 2015 Republic Bank of Trinidad and Tobago was seeking a majority stake in Ghana’s HFC Bank, which was established as Home Finance Company in 1990, was listed in 2005 and controls about 30% of the country’s mortgage market. Republic Bank has been accumulating HFC shares for a number of years. It began by buying 8.79% of the institution in a 2012 private placement. The following year it acquired an additional 23.23% stake from Aureos Africa Fund, a Mauritius-based private equity firm. Another 7.98% of HFC stock was acquired by Republic Bank in September 2013, from Union Bank of Nigeria, bringing the total to 40%.

In March 2015 the bank offered GHS1.60 ($0.44) a share, about 18% above its trading price, in an effort to obtain a majority. The deal faced considerable resistance. In late April SSNIT said that it would not be selling its 26.14% stake, as it was satisfied with the returns it has been receiving from its ownership in the bank. By May other major institutional shareholders said that they were selling to the foreign institution, with the Ghana Cocoa Board (COCOBOD) indicating that it would unload its 5.57% stake to RBTT. According to local press reports in early May, the Trinidadian bank was able to gain a total of about 57% of the shares.

Other major actors from the US and Europe are also looking to move in. JP Morgan received a banking licence from the Ghanaian authorities in late 2012, according to press reports. Local media also reported that HSBC and Deutsche Bank are considering opening offices in the country.

Consolidation & Expansion

The market is crowded but competitive – indeed, having fewer banks might increase concentration and make the sector less responsive than it is. However, the increased cost of doing business is a key argument in favour of consolidation. Financial institutions are being hit with expenses related to compliance, including know your customer (KYC) and anti-money laundering (AML). For small institutions, this squeezes margins and hits profits and could compel them to seek or accept combinations. Some mergers and acquisitions have certainly occurred in recent years. Ecobank acquired the Trust Bank Ghana (TTB) in 2012, Access Bank bought Intercontinental Bank, also in 2012, and Bank of Africa acquired Amalgamated Bank in 2011.

However, not all acquisition attempts have gone as smoothly as this. The banks themselves are very profitable, which means getting shareholder agreement is a challenge, and prices will likely be high. In addition to First Rand’s attempt to acquire Merchant Bank, Stanbic tried to buy Agricultural Development Bank (ADB) in 2007, but it was resisted by unions and civil society groups. HFC was also said to be pursuing TTB, according to local press reports in late 2011, but SSNIT refused to sell and the deal never went through.

“In the banking sector, it is difficult to consolidate the market,” said Francois Marchal, deputy managing director of Société Générale Ghana. “Asset prices are too high. No one wants to sell at a good price. There is no reason to consolidate. There are no major threats driving consolidation. There is capital pressure, but it’s not that big.”

However, significant activity has taken place at the low end of the market. The larger banks are starting to see the advantages of getting into micro-lending and micro-savings but are hesitant to try building that capacity organically, so they buy existing small players. In September 2014, Fidelity Bank acquired 100% of ProCredit Savings and Loans Company, which has been licensed since 2002 and is strong among small and medium-sized enterprise (SMEs) and very small businesses.

ProCredit was owned by foreign investors, making the transaction the first in which a local bank purchased a foreign-controlled savings and loan. “Banks should take more risk than entrepreneurs but this doesn’t happen,” Nana Ababio, chief operations officer of ASN Holdings, told OBG.

League Promotion

Another trend has been in the conversion of smaller lenders into full banks. In September 2014 First National Savings and Loan became GN Bank. Attaining bank status will allow it to clear its own cheques and directly access funding at the central bank. Moreover, Liberty Micro-finance said in late 2014 that it was planning to become a savings and loan company.

GN Bank will continue to focus on its traditional strengths and serve the micro and SME market segment. “With GN Bank, our strategy is to go to the SME sector, where the banks don’t want to go,” said Samuel Kofi Ampah, head of research and marketing at Gold Coast Securities, a sister company of GN Bank. The bank will also continue to focus on underserved regions and roll out more of its Money Store branded outlets.

“Improving SME growth is crucial to sustaining the country’s economic development, and a key part of that is the role of the financial services sector, not only through lending but through non-bank leasing activities, which can help provide access to tools, equipment and services,” Alex Mbakogu, managing director of Leaseafric, told OBG.

Size Matters

Ghana’s discovery of oil and increased spending on infrastructure – as well as the large sums used to fund agricultural and mineral deals – have meant there has been sizable scope for lending in the local economy, even if the number of potential large deals remains fairly limited in comparison to bigger African markets such as Nigeria or South Africa. However, Ghana’s banks are generally too small to take on the larger deals in the economy. “There are not that many big deals to be funded domestically, but most of the banks don’t have the critical mass, especially in a market where compliance costs are so high,” Marchal said.

Critics argue that GHS60m ($16.7m), even GHS120m ($33.3m), of capital is not enough to allow banks to finance the oil or infrastructure projects that are being developed or will be developed in the coming years. This is particularly the case in Ghana where syndication is not often used domestically. For example, COCOBOD, which needs huge sums to buy from the farmers at harvest time, has to resort to the international banking market. In 2014, a syndicate of foreign banks offered the board $1.7bn in loans for the 2014/15 growing season. “The banks need bigger capital to take on bigger tickets,” said Philip Cobbinah, assistant director of the banking supervision division at the BoG.

Regulators have encouraged greater lending in the local market. A push to prevent foreign banks from using their sister group companies for syndication has ended. For a time, the local banks and the regulators had questioned whether this practice, which resulted in loan capacity going offshore, should be allowed. By 2015, officials at the central bank said that they would not restrict it. “There is plenty of potential for further development in Ghana’s leasing sector, both in terms of providing services to domestic companies as well new and incoming foreign investors,” Mbakogu told OBG.

Capital Requirements

The BoG has undertaken a series of higher capital requirements. However, the banks have had little trouble meeting the requirements, as there is great demand for their debt and equity. UT Bank undertook a series of capital raises in 2012, taking a loan from Deutsche Bank and bringing in equity from an investment group. CAL Bank did a GHS75m ($20.8m) private placement, also in 2012. In 2014 Fidelity Bank raised $67m of Tier 1 capital and $60m of Tier 2 from a variety of international sources, bringing it into the ranks of the best capitalised banks in the country. In late 2014 Guaranty Trust Bank opened a $20m facility with FMO, a Dutch development bank.

The central bank says that it is not going to push banks to raise capital further. All new banks need GHS120m ($33.3m) and while the BoG would like all banks to go to that level, it is not inclined to require them to do so. “We have not enforced it,” said Cobbinah. “We just use moral suasion.”

ADB IPO 

A significant shake-up is in the works with the planned listing of the ADB, which could augur well not only for the banking sector but also the capital markets. The ADB was founded in 1965 as the Agricultural Credit and Cooperative Bank and was from its inception a policy institution.

In May 2015 the bank received approval from the Securities and Exchange Commission (SEC) for an initial public offering (IPO) of shares. ADB is currently 52% owned by the government and 48% by the BoG, and the expectation is that half of the equity will be sold to the public in the sale (down from the original target of 75%). Existing and new shares will be sold, according to press reports.

The transaction has been in discussion for some time. Cabinet approval came in early 2014 (and the bank expressed interest in an IPO as early as 2012), but the bank’s employee union accused the management of wrongdoing ahead of the sale. In early May 2015 the offering was placed on hold as the parties discussed these issues, but following the withdrawal by the union of litigation against the bank, the IPO was re-opened in late August, with the expected listing date in late 2015.

Proceeds will be used for bank restructuring, while the institution will move from its headquarters building to rented space at the new Accra Financial Centre. The bank has said an IPO will allow the institution to remain indigenous, but press reports in early 2015 indicated that foreign investors have shown interest in the offering.

Regulation

The Banking Act 1970 was followed by the Banking Law 1989. This banking law was superseded by the Banking Act 2004, which followed the BoG Act 2002 and was amended in 2007. Over time, and as a result of these laws and acts, capital and liquidity requirements were introduced, supervision was put into place, universal banking licences were added, and offshore banking was allowed and regulated.

The Banking Act 1970 set minimum capital requirements for local and foreign banks, and a universal banking licence was made available in 2003 to banks with sufficient capital. The Banking Act 2004 was passed the next year and superseded the Banking Law 1989. It covered issues such as supervision, control, ownership, capital and liquidity. The Banking (Amendment) Act 2007 established three classes of banking licences: class I, which allows the holder to undertake domestic business; class II, which permits offshore banking; and class III, which allows for both. The cedi was re-denominated, with GHS10,000 becoming GHS1 in 2007, after which minimum capital was increased from GHS7m ($1.9m) to GHS60m ($16.7m). Foreign banks were given to the end of 2009 to reach that level; local banks had to hit the level by the end of 2012, with an intermediary goal of GHS25m ($6.9m) in 2010. All banks met the minimum by the target date. New universal banks are required to have GHS120m ($33.3m), and in 2013 the central bank discussed making this level a requirement for all commercial banks. Ultimate responsibility for oversight of the banking sector belongs to the central bank, and it is charged with keeping the system liquid and solvent, protecting the interests of depositors, and making sure that the banks remain profitable. It must also make sure that the banks are competitive and that the payments system is efficient.

The major regulatory acts and laws such as the Credit Reporting Act 2007 and AML Act 2008, have been supplemented over the years with a series of amendments and regulations designed to fill the gaps and take care of problems along the way. These have dealt with issues such as credit reporting, KYC, the publication of charges, the ending of certain fees and AML. Rural banks, which were first established in Ghana in 1976 to provide credit to small-scale farmers and rural enterprises, are regulated by the RCB Apex Bank.

Rates

As is the case throughout West Africa, interest rates in Ghana have been a delicate subject. With high street rates often in excess of 20% for all but the largest blue-chip customers, the business community and the government have complained that banks charge too much for their money and that this holds back economic development in the country – while banks argue that a lack of transparency among borrowers and high compliance costs necessitate the high rates.

The central bank’s answer is not to control prices but to bring more visibility to pricing. To this end, in April 2012 the BoG introduced a new system for banks to calculate their base rates. They all have to follow the same formula: cost of funds plus operational expenses plus loan loss provisions plus a profit margin. The new rule, effective in 2013, requires banks to publish this rate and not to lend below the rate. This should prevent banks from dumping into the market, providing a good starting point for negotiation. The process resulted in a wide range of base rates. According to a local media report in May 2015, the lowest was Bank of Baroda, at 16.46%, and the highest was uniBank, at 33%. Ecobank was 25.95%; Ghana Commercial Bank, 22.10%; Barclays, 21.81%; Standard Chartered, 20.92%; and Stanbic, 25.00%. At this time the BoG’s daily interest rate was around 23.5%. “What we have done is bring more transparency into the market,” said the BoG’s Cobbinah. “We wouldn’t want to dictate the price of your products.”

Critics argue that the base rate is of limited use. In public comments published in the local press, economist Kwame Pianim said that the system will do nothing to get interest rates under control. He argues that the formula is just another way of feeding high interest rates through to the borrower and that interest rates will remain high until the government gets its domestic borrowing under control. Barring that, banks will not be able make loans at decent rates. “The elephant in the room is the bad macroeconomic management that we have had for so long,” he told local press in early 2015. “What BoG did in that formula was normalise into the pricing equation the high cost of Treasury bills, which was around 22%.”

The government would like rates to go lower, as the high cost of funding is resulting in less business activity, leading to lower tax revenues and the need for it to borrow more. Addressing the root cause of the situation is difficult. “[The government does not] have the moral right. They don’t come with clean hands because of the substitution effect of Treasury bills,” argues Godfred Bokpin, a lecturer at the University of Ghana Business School. “The government cannot blame the banks.”

New Legislation

 A new BoG Act is under discussion, and a key provision in the proposed legislation will reduce the amount of money the central bank will use in support of the government to zero – in line with IMF recommendations that this happen by 2016. The new act is also supposed to reinforce the autonomy of the central bank.

The central bank also says that a new Banking Act is being developed. This will institute a deposit insurance system. While this has been discussed, and deadlines have come and gone, the central bank says that a structure has been formulated and is being reviewed. A new company will be formed that will take premiums from the banks and provide GHS5000 ($1387) of insurance per account. The central bank also says that it is seeking to have a third-party review of all banking assets.

Credit Bureaux

Three credit reference bureaux are operating in Ghana: XDS Data Ghana, HudsonPrice Data Solutions, and Dun & Bradstreet. The first of the bureaux, XDS Data Ghana, was licensed 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 their data to make lending decisions. According to the BoG, at the end of December 2014 all DMBs and NBFIs had signed up for credit reference services and had been submitting data to the credit reference bureaux. In 2014 the number of credit checks made by financial institutions rose by 79.4% to 948,360.

Microfinance

The microfinance sector plays a crucial economic role, with more than 500 institutions currently lending small amounts to SMEs and lower-income households. “Unlike microfinance institutions in east and southern Africa, microfinance institutions in Ghana are full-fledged commercial activities,” Ababio told OBG.

However, the segment’s size has meant that the stability of many of the institutions has not always been up to par, and the BoG has taken a closer look at the operations of the subsector and has required the companies to be registered and capitalised. In 2013 it raised the minimum capital to GHS500,000 ($138,750) and required additional capital if the institution had more branches (though it gave existing companies through 2016 to comply).

The BoG is also advising the companies to have 10% of their assets held in accounts with licensed universal banks and 20% in government bonds. In early 2015 the BoG’s strategy became more aggressive. It said it would shut down more than 100 microfinance companies and that it was considering a further increase in capital requirements to GHS1m ($277,500). In public comments, bank officials said they were concerned about the liquidity of these firms. While the businesses can be very profitable, they rely on short-term funds and must ensure they are able to meet obligations.

Four months after it increased the minimum capital for microfinance institutions by 100%, from GHS500,000 ($138,750) to GHS1m ($277,500), the BoG doubled the minimum paid-up capital requirement for obtaining a Tier 2 and Tier 3 microfinance institution licence to GHS2m ($555,000) in July 2015. The new rules should limit the number of failures, which have been common in recent years.

An estimated 46 microfinance institutions collapsed in 2013, and this has understandably resulted in concern on the part of the public. In early 2015 customers of DKM Microfinance, whose assets had been frozen for 90 days by the BoG, sued the central bank to get their money and are now waiting for the company to be liquidated.

Outlook

While the sector is strong, the economy has grown slower than expected while the government debt and deficit has remained persistent. It is therefore only a matter of time before these general difficulties feed through to banks’ balance sheets. Conversely, with the banks hesitant to loan, they face the daunting task of growing their client base once the recovery does eventually come.

With the emphasis on government paper, they will have to rebuild credit analysis capacity when it makes more sense to make more loans to businesses. While the banks are in a good position to weather the storm, but long-term growth, sustainability and relevance remains the main challenge.