What is behind Ghana's successful banking performance in 2020?

Moves prior to the Covid-19 pandemic to shore up the banking sector proved prescient, as it put local institutions in an advantageous position to face the unique challenges posed by the health crisis. After a sector clean-up, both assets and deposits rose as asset quality improved, and higher minimum capital requirements ensured that banks were more resilient to shocks. This positive trend continued into the pandemic, bolstered by digitalisation initiatives aimed at both improving service provision for existing customers and attracting the previously under- and unbanked.

Structure

The number of universal banks dropped from 36 in 2017 to 23 by December 2021 as a result of a clean-up exercise and regulatory changes executed by the Bank of Ghana (BoG), the country’s central bank. As of that month there was one mortgage firm, three finance and leasing companies, 11 finance houses, 25 savings and loan companies, 31 microcredit firms, 137 microfinance institutions, 144 rural and community banks (RCBs), and 415 foreign exchange bureaux licensed to operate in Ghana. There were also four representative offices of international institutions: Citibank Ghana; Ghana International Bank, the Export-Import Bank of Korea and Bank of Beirut.

The top-five banks account for nearly half of total deposits in the country. The two largest banks by assets represented almost a quarter of total deposits at the close of 2020, according to a 2021 report by Ghanabased investment firm Tesah Capital. Togo-headquartered Ecobank accounted for 12.4% of total deposits and had GHS16bn ($2.74bn) in assets, while locally owned GCB Bank had a deposit market share of 11.5% and GHS15.5bn ($2.65bn) in assets. Stanbic Bank Ghana, Absa Bank and Consolidated Bank Ghana represented 9.7%, 6.6% and 6.6% of total deposits, respectively.

The report noted that these banks also accounted for the greatest value of loans: Ecobank represented 10.4% of total loans, followed by Absa Bank (9.9%), Stanbic (9.2%) and GCB Bank (8%). The report included 21 of Ghana’s 23 banks, as financial statements for OmniBSIC Bank Ghana and National Investment Bank had yet to be released at the time of the report’s publication.

Oversight

Established in 1957, the BoG is responsible for supervising, regulating and directing banks, nonbank financial institutions, and the country’s payment and settlement systems. It also works to facilitate a competitive environment in which the solvency, asset quality, liquidity and profitability of banks is maintained. Legislation introduced in 2016 gave the BoG more supervisory power over all deposit-taking entities – including non-bank financial institutions – and enabled it to supervise banking groups and financial holding companies in a consolidated manner.

The Ghana Deposit Protection Corporation, which became operational in September 2019, aims to protect individuals’ deposits from losses associated with bank failures, while at the same time supporting the development of a secure financial system for depositors and investors. The organisation manages two funds: one from which reimbursements for bank deposits are made, and a second for reimbursements for deposits in specialised and deposit-taking institutions (SDIs).

Regulations

In 2015-16 the BoG conducted a review of the banking sector, which found that local institutions faced challenges related to solvency, liquidity and asset quality. Some banks were particularly under-provisioned and had capital shortfalls, undermining confidence in the sector. In response, the BoG raised the minimum capital requirement to GHS400 ($68.4m), up from GHS120m ($20.5m), in September 2017, which helped clean up poor business practices and weak capital positions. However, as of mid-2021 the BoG had collected GHS1.7bn ($290.7m) out of the GHS25bn ($4.3bn) owed by defunct institutions, with officials citing hesitancy in the judiciary for the delay.

Nevertheless, the clean-up exercise made the sector more resilient. Both assets and deposits increased as a result: assets expanded from GHS86.1bn ($14.7bn) in August 2017 to GHS115.2bn ($19.7bn) in August 2019, while deposits rose from GHS53.7bn ($9.2bn) to GHS76bn ($13bn) over the same period.

“An extensive banking sector clean-up, together with an improved supervisory and regulatory framework, had laid the foundations for financial stability,” noted the IMF’s July 2021 Article IV consultation, citing the country’s work on liquidity and risk management, as well as improvements in anti-money-laundering and counter-terrorism financing frameworks. While the international community has recognised the BoG’s efforts as having had a positive impact, others argue that they have reduced competitiveness. “The clean-up and the refund of monies to depositors have restored investor confidence and protected the hard-earned savings of millions of Ghanaians. However, the 5% financial sector clean-up levy on pre-tax profits can have an adverse effect by making Ghana’s banking industry less competitive in attracting private capital. It is hoped that this temporary tax will fall away as originally proposed, or even sooner,” Farid Antar, managing director of Republic Bank, told OBG.

In 2020 the BoG began a comprehensive review of SDIs as part of the central bank’s wider Financial Sector Development Project to identify gaps in the regulatory framework that resulted in the BoG shutting more than 400 such institutions in 2019. “It was important to protect depositors of these institutions, whose deposits had been locked up for months and years,” Elsie Addo Awadzi, second deputy governor of the BoG, told local press in October 2021. “The general public continued to do business with these institutions without knowing their true financial condition.” As of July 2021 the process – which was conducted with technical assistance from the World Bank – was ongoing.

In addition to the SDI review, the government implemented a series of measures to bolster the banking sector’s soundness in 2020. These include an amended capital requirement directive to include 50% of unaudited profit and a reduction in the leverage ratio from 6% to 4.5%. The central bank also issued sustainable banking principles, including fostering gender equality; facilitating financial inclusion; promoting environmental, social and governance practices in the sector; and mandating compliance reporting.

Performance

By the end of 2020 banks had a total of GHS149.3bn ($25.5bn) in assets, up 15.7% from the GH129.1bn ($22.1bn) recorded the previous year, according to the BoG. While banks’ assets expanded, they did so at a slower rate than the 20.2% seen in 2019 due to the adverse effects of the Covid-19 pandemic on the banking sector. Asset growth was primarily driven by increased levels of deposits, which expanded by 24.4% to GHS103.8bn ($17.7bn). Banks’ assets comprised investments (43.1%), net advances (28%), cash from banks (21.2%) and other assets (7.7%). Meanwhile, banks’ liabilities that year were dominated by deposits (69.6%), followed by shareholders’ funds (14.2%), borrowings (9.7%) and other liabilities (6.5%).

While banks accounted for 91.1% of the sector’s assets in 2020, SDIs, for their part, recorded a share of 8.9%, with GHS14.5bn ($2.7bn) in assets. RCBs accounted for the second-largest share of assets, with GHS6.2bn ($1.1bn), up from GHS4.7bn ($803.7m) the previous year. Microfinance institutions held assets worth GHS895.5m ($153.1m) in 2020, an increase from GHS783.4m ($134m) in 2019. Savings and loans, finance houses, and mortgage and leasing companies had combined assets of GHS7.5bn ($1.3bn) in 2020, bringing the banking sector’s total assets to GHS163.9bn ($28bn).

The banking sector remained profitable and liquid despite the challenging economic environment. Return on assets improved, from 3.6% in 2017 to 4.1% in 2019 and 4.4% in 2020. Return on equity also rose, from 18.7% in 2017 to 21.4% in 2020, as did return on earning assets, from 4.7% to 5.9%. Meanwhile, the ratio of broad liquid assets to total assets rose from 61.1% in 2019 to 64.1% in 2020, due to banks holding more long-term instruments such as securities. However, the ratio of broad liquid assets to total deposits fell from 92.1% at the close of 2019 to 89% at end-2020, while the ratio of core liquid assets to total assets decreased from 24% to 21.2% over the same period.

During the first six months of 2021 assets, deposits and investments all saw sustained growth. Banks’ total assets reached GHS162.9bn ($27.9bn) at the end of June – a 17.2% year-on year (y-o-y) increase – according to the most recent BoG figures. That month deposits rose by 21.5% y-o-y to GHS110.3bn ($18.9bn), which the central bank attributed to liquidity inflows from fiscal stimulus measures, and payments to contractors and SDI depositors. Meanwhile, total borrowings saw a more moderate increase – up 5% y-o-y to GHS17.2bn ($2.9bn) on the back of increased deposits, higher loan repayments and liquidity released after the central bank lowered reserve requirements.

Lending

Credit growth slowed from 25.7% in 2019 to 4.6% in 2020 due to the pandemic, which saw businesses and individuals pull back, lowering credit demand. At the end of 2020 net loans and advances reached GHS41.8bn ($7.1bn), compared to GHS40bn ($6.8bn) at end-2019. New loans and advances expanded at a higher rate of 15.8% to GHS34.4bn ($5.9bn). Loans to the private sector dominated bank portfolios in 2020, at 91.1% of all credit, with outstanding credit to the private sector standing at GHS43.5bn ($7.4bn), up 10.6% from GHS39.4bn ($6.7bn) the previous year.

The services sector accounted for the largest portion of private sector loans in 2020, at GHS11.6bn ($2bn), followed by commerce and finance (GHS9.9bn, $1.7bn), manufacturing (GHS5bn, $855m) and construction (GHS4.4bn, $752.4m). Domestic credit to the private sector, meanwhile, accounted for 11.5% of GDP, with net domestic credit reaching GHS135.2bn ($23.1bn). This figure has expanded significantly since 2000, from GHS1.1bn ($188.1m) to GHS91bn ($15.6bn) in 2019.

Lending Rates

Relatively high lending rates have been identified by some in the business community as an impediment to investment and economic growth. In 2018 banks began using the Ghana reference rate (GRR) as a benchmark against which to price their loans, with a customer-specific premium added to establish the lending rate. The GRR largely follows the BoG’s monetary policy rate, which has been moving downwards since 2016 as the central bank responded to lower inflation levels. Even as inflation went up – from 7.1% in 2019 to 9.9% in 2020 – the bank continued to lower the policy rate over the course of the pandemic, from 16% to 14.5% in March 2020, and again to 13.5% in May 2021, where it remained as of December 2021, to facilitate lending and spur economic activity.

Mirroring this trend, the GRR eased from 16.32% in March 2020 to 14.77% in May 2020 and 13.89% in December 2021. While the lower policy rate has allowed banks to cut their lending rates, average lending rates remain relatively high, ranging from around 17% to 25% throughout 2021. This is largely attributable to risk premium, which remain elevated due to banks’ continued concerns about non-performing loans (NPLs).

Asset Quality

The central bank has prioritised improving the aggregate asset quality of the banking sector. As a reflection of these efforts, NPLs have been on a downward trend in recent years, from 21.6% of total loans in 2017 to 13.9% in 2019. While economic pressure from the pandemic caused this figure to increase to 14.8% in 2020, the capital adequacy ratio at the close of the year stood at 19.8% of risk-weighted assets – above the regulatory minimum of 11.5%, underscoring banks’ ongoing scope for lending and adequate capital buffers to absorb potential losses.

The NPL ratio continued to rise in 2021 amid the pandemic. At the close of the second quarter the NPL ratio reached 17%, accounting for a total value of GHS8.1bn ($1.4bn). The stress on loan portfolios was driven in large part by NPLs in the commerce and finance sectors, whose NPL ratio increased from 28.8% in June 2020 to 33.3% in June 2021, as well as the construction sector, which saw its NPL ratio rise from 11% to 18.3%. However, all other economic sectors saw their NPL ratio decline, with the sharpest fall recorded in the electricity, water and gas sector (from 11% to 5.8%), and agriculture, forestry and fishing (from 8.8% to 5.4%).

Ghana’s banks are in a strong position to absorb higher levels of asset quality risk from customers experiencing continued economic pressure due to the pandemic, according to a March 2021 report from international credits agency Fitch Ratings. The agency attributed this to the country’s efforts made prior to the health crisis to address energy sector asset quality issues, raise minimum capital requirements and facilitate consolidation, as well as relief measures to ease the immediate economic impact.

Financial Inclusion

Banking penetration has increased in recent years following sustained government efforts to boost financial inclusion, with account ownership doubling between 2011 and 2017. By August 2020 nearly half of Ghana’s population of 31m individuals had a bank account or access to mobile money. The latter has been key to bolstering financial inclusion and bringing previously unbanked individuals into the formal financial sector. Mobile technology is also enabling those in the informal financial sector to access credit. “The microloan industry is moving towards more data analytics in its assessment of risk for loans to the informal sector,” Arnold Parker, CEO of Letshego Ghana, a financial services provider, told OBG. “For example, volume and frequency of air-time purchases and movement between cell sites can be used as indicators of economic mobility and capacity to repay.”

Efforts in recent years to support the development of mobile money proved to be prescient after the outbreak of Covid-19, which saw governments around the world implement social-distancing and lockdown measures. As the measures drove people to move their business activity online, it presented an opportunity for mobile money players to expand their reach. Indeed, the value of mobile money transactions expanded by 82.4%, from GHS309.4bn ($52.9bn) in 2019 to GHS564.2bn ($96.5bn) in 2020, while the number of active mobile money accounts rose by 18.5% to 38.5m at the close of 2020. Growth in the value of mobile money payments continued in 2021, reaching GHS657.6bn ($112.4bn) in the first eight months of the year.

Building on the success of mobile payments, government officials are looking to expand the use of other forms of financial technology (fintech) to boost financial inclusion and deepen participation in the formal financial sphere. In addition to mobile money providers, smartphone applications such as and Expresspay and Zeepay – a wholly Ghanaian-owned fintech that aims to connect mobile money wallets, cards, ATMs and bank accounts – crowdfunding apps like GoFundMe and Kickstarter, and blockchain technologies such as cryptocurrencies are increasingly important players in the country’s fintech ecosystem.

In line with the government’s push to promote fintech, in April 2020 the BoG granted a dedicated electronic money issuer licence to Zeepay, a first for a fintech, allowing it to provide bill payment, peer-to-peer transfer and airtime top-up, among other services. The fintech has operations in 20 markets across the continent, and in June 2021 raised $7.9m in Series A funding.

Sustainability

Ghana is also working to grow its financial offerings through sustainable banking. In December 2019 the BoG released Sustainable Banking Principles and Guidance Notes to align the sector with environmental, social and governance criteria. These principles are expected to facilitate the creation of a wider set of sustainable financing options, including sustainable bonds (see Capital Markets chapter).

Outlook

Ghana’s banking industry has grown steadily in recent years, strengthened by government efforts to shore up confidence in the sector and improve asset quality. While the sector remains highly concentrated, the introduction of new technologies and products is expected to foster diversification as new players disrupt the sector. This bodes well for the widening of financial inclusion, especially as small and medium-sized firms, as well as informal businesses, gain access to credit.