Banking in Ghana: 50 years on

The Golden Jubilee edition of the Ghana Banking Awards is themed on the challenges, and prospects, of the industry. Aided by the highlights given at the launch of Awards by Dr. Mahamadu Bawumia, Deputy Governor of the Bank of Ghana, CLEMENT TUONURU explores the landscape of banking in Ghana over the last 50 years. Additional notes are provided by NANA OTUO ACHEAMPONG…


Introduction
The banking system in Ghana has undergone at least two phases: pre-reform and reform periods. Before independence, two overseas branches of British Commercial banks (referred to as “Expatriate Banks”) dominated the banking scene in Ghana. These included the Barclays Bank and the Bank of West Africa (later to be known as Standard Chartered Bank). Their categorisation as Expatriate Banks presumably evolved from the definition of “foreign bank” as enshrined in section 47 of the Banking Act 1970, to mean “any bank or banking enterprise incorporated in Ghana in which less than 55 percent of the equity share capital is held by Ghanaians”.

These banks were highly inaccessible by the average Ghanaian as most farmers and indigenous businesses were largely neglected by these expatriate institutions. The branches of these banks were located only in the urban commercial centres which could only be reached by a few lucky Ghanaians found in those areas.

In this regard, the national government, after independence, adopted development priorities that emphasised rapid industrialisation, modernisation of agriculture and the national economy.

The discourse below examines the banking system in Ghana in the last 50 years under the pre-reform and reform periods. It also evaluates the impact of the financial sector reforms on banking in Ghana.

Phase One
Post-independence financial sector policies
The post independence period witnessed extensive state intervention in the financial sector policies. Public ownership dominated the banking system. All the banks set up between the early 1950s and the late 1980s were mainly owned by the public sector except the “Expatriate Banks” where government held minority shares.

Interest rates were administratively controlled by the Bank of Ghana (BoG) and a variety of controls were also imposed on the asset allocations of the banks, such as sectoral credit directives. For example, BoG determined how much credit should be allocated to say, the agricultural sector and how much to the service and other sectors of the economy. It also determined the interest rate to be charged on credits allocated to the various sectors of the economy.

The motivation for these policies was based on the belief that, because of market imperfections and the nature of the financial system inherited from the colonial period, the desired pattern of investment could not be realised without extensive government intervention in the financial markets. An imperfect market exists when the forces of demand and supply fail to achieve allocative efficiency of goods and services. The problem is sometimes partly solved through State intervention.

Establishment of public sector banks
To arrest the allocative efficiency problem, the government established its own commercial and development banks, at least for two reasons: the belief that the operational focus of the foreign commercial banks, in particular their lending policies, was too narrow, thus depriving large sections of the economy of access to credit, and also the contention that sectors important for development, such as industry and agriculture, required specialised financial institutions to supply their funding needs.

In line with the above reasons the following state banks were established. The first of these banks was the Ghana Commercial Bank (GCB), established in 1953 to improve the access to credit of indigenous businesses and farmers. It was also to extend a branch network into rural areas, so that people in the rural areas would have access to banking facilities and was heavily involved in lending to agriculture.

Three development finance institutions were also set up: the National Investment Bank in 1963, to provide long term finance for industry; the Agricultural Development Bank in 1965 and the Bank for Housing and Construction in 1974, to provide loans for housing, industrial construction and companies producing building materials. These banks mobilised funds from deposits as well as from government and foreign loans and undertook commercial banking activities as well as development banking.

The Social Security Bank (now Societe-Generale Social Security Bank) came into the banking scene in 1977. It also provided credit, including long term loans, for businesses and consumers and invested in the equity of several large businesses. In 1975, there emerged two minor commercial banks which included the National Savings and Credit Bank, formerly the Post Office Savings Bank and the Cooperative Bank, which were charged with providing consumer loans, credit for small industries and cooperatives.

Interest rate policy
The BoG determined the structure of bank interest rates, including minimum interest rates for deposits and maximum lending rates. The agricultural sector was one of the priority sectors which received preferential lending rates. The structure of interest rates set by the BoG made no allowance for loan maturity or risk. Indeed, incentives for banks to extend credit were often perverse because riskier sectors such as agriculture were accorded a preferential rate. Nominal interest rates were held below prevailing inflation rates in most years and when inflation accelerated in the late 1970s and early 1980s, real interest rates were highly negative.

Credit controls
Sectoral credit guidelines, based on an annual credit plan, drawn up by the BoG, were imposed on the banks to channel credit towards the priority sectors of agriculture, manufacturing, and exports. These usually took the form of maximum permitted percentage increases in the stock of loans to each sector, with priority sectors accorded larger increases. The sectoral credit directives appear not to have been strictly enforced and from 1981, an additional regulation stipulated that lending to agriculture should comprise a minimum of 20% of total loans, with shortfalls to be transferred to the Agricultural Development Bank. Foreign companies were required to obtain BOG permission to access loans from domestic banks.

Demonetisation exercises and anti-fraud measures
Some measures taken by the government during the late 1970s and early 1980s further eroded public confidence in the holding of currency and bank deposits. The most drastic were the two currency appropriations in 1979 and 1982, adopted in an attempt to reduce the money supply and therefore inflation, but the public were discouraged from holding bank deposits by a number of measures aimed at countering fraud. Banks were mandated in 1979 to furnish authorities with information on their customers’ assets. In 1982 accounts in excess of ¢50,000 were frozen pending investigation for fraud or tax liabilities. Bank loans for the financing of trade inventories were recalled and compulsory payment by cheque was introduced for transactions in excess of ¢1,000.



Prudential regulation and supervision
The 1970 Banking Act provided the regulatory framework for the banking industry. This Act imposed an amount of ¢2m and ¢0.5m respectively as minimum paid up capital requirements for foreign and locally owned banks.

Banks were also required to maintain capital and reserves of at least 5% of their total deposits, a step which essentially seem to be an insurance against insolvency. The capital adequacy requirements were in any case largely meaningless because of the absence of clear accounting rules regarding the recognition of loan losses, provisioning for non-performing assets and the accrual of unpaid interest. The true state of banks’ balance sheets, including the erosion of their capital as a result of loan losses, could therefore be cancelled.

Although the Banking Act did provide some rules to constrain imprudent behaviour by banks, penalties for infractions were minimal. There were also important regulatory omissions such as limits on single borrower loan exposures.

In 1964, a Bank Examination Department was fashioned out of BoG with its regulation mainly centred on ensuring that banks complied with the allocative and monetary policy directives such as sectoral credit directives and reserve requirements rather than prudential regulations. This department lacked the requisite resources to monitor and inspect the banks especially, regarding the banks’ asset portfolios, their profitability and solvency.

Impact of the policies on the banking industry
The pre-reform policies of financial repression and public ownership of banks had important consequences for the banking industry. With the exception of those banks which retained foreign equity participation like Barclays, Standard Chartered Bank and Merchant Bank, the others became insolvent as a result of bad debts and investments in commercially unsuccessful ventures.

Below are some of the repercussions emanating from the post-independence financial sector policies.

Financial repression caused severe financial shallowing in Ghana. The broad money supply to GDP ratio, which had been relatively stable at around 29% from 1964-74, rose briefly in the mid 1970s, to a peak of 29% in 1976 and then collapsed to 12.5% in 1983. Moreover, bank deposits became less attractive relative to cash with the currency/M2 ratio rising from 35% in 1970 to 50% in 1983. This was a manifestation of disintermediation from the formal financial system with bank deposits only amounting to 7.4% of GDP in 1984, falling from 19.5% in 1977.

The main causes of this jinx in the banking industry were, among other things, the sharply negative real deposit rates, which deterred savers from holding financial assets. The currency appropriations of 1979 and 1982, the freezing of bank accounts and the decree mandating the government to demand details of customers’ bank accounts from banks, all serve to phase out public confidence in holding domestic currency and using the banking system, instead of encouraging the use of informal financial intermediaries and the holding of savings such as buildings and constructing materials, or foreign assets. Long queues at banks, a consequence of inefficiency and the lack of large denomination bank notes, also deterred the public from depositing cash in banks. Moreover, banks were discouraged from active deposit mobilisation because interest rate controls and the very high statutory reserve and liquid asset requirements prevented banks from channelling depositors’ funds into remunerative outlets.

Although financial sector policies aimed to support priority sectors through the use of sectoral credit guidelines and preferential interest rates, the supply of credit to these sectors declined sharply in real terms. Credit to the whole of the non government sector amounted to only 3.6% of GDP in 1983 having falling from 9.8% in 1977.

The main reasons for the decline in the supply of credit were due to the high insolvency that befell the banks which reduced the volume of funds available to the banks for lending to all sectors of the economy including the priority sectors. Besides, some of the sectoral allocations were diverted into other private uses rather than the intended purpose.

Banks were reluctant in the sectoral allocation of their available funds because of the lending rate controls which did not adjust for the risk of lending, or for transactions costs.
Banks had strong incentives not to lend to potentially risky borrowers but to invest in government securities since the latter were both liquid and virtually risk free as compared to the former.

Almost all the public sector banks were afflicted by financial distress in the 1980s. They had all been rendered insolvent by Non-Performing Assets (NPAs) and had to be restructured between 1989 and 1991, when a total of ¢62 billion of NPAs was identified in the banking system and replaced by BoG of bonds or offset against liabilities of the banks to the BoG or the government.

The NPAs included non performing loans, letters of credit and equity investments which yielded no income. Non performing loans amounted to ¢32 billion, representing 41% of all outstanding loans to the non government sector. Loan losses would have been much greater had lending not been curtailed by the high liquid reserve requirements and credit ceilings imposed in the 1970s and 1980s.

The main reasons for the losses incurred by the public sector banks was that they had been pressured into extending finance to unbankable projects to meet developmental and political objectives. The banks were very vulnerable to political pressures because the government had the authority to appoint and dismiss the banks’ executives and managers. The economic crisis and the radical changes in economic policy implemented during the 1980s also contributed to the deterioration in the banks’ asset portfolios. Many importers, to whom letters of credit had been extended by the commercial banks, were unable to meet their obligations following the large exchange rate devaluations which began in 1983.

The extent of the financial distress in these banks was only revealed when diagnostic studies were conducted in 1987 as part of the preparations for the Financial Sector Adjustment Programme (FINSAP).

Phase Two
Financial sector reforms
Financial sector reforms have been implemented since the late 1980s as part of the ongoing Economic Recovery Programme (ERP). This encompassed the partial interest rate liberalistion in 1987 and the removal of sectoral credit ceilings in the following year. This was accompanied by the liberalisation of access to foreign exchange and the licensing of foreign exchange bureaux. In 1989 the FINSAP was started supported by a financial sector adjustment credit from the World Bank.

The objectives of the FINSAP were among others, to address the institutional deficiencies of the financial system, in particular by restructuring distressed banks, reforming prudential legislation and the supervisory system, permitting new entry into financial markets by public and private sectors financial institutions and developing money and capital markets.

Further financial market liberalisation occurred in 1992 with the adoption of indirect instruments of monetary control which entailed the introduction of market determined Treasury bill rates. Since 1994, a second phase of FINSAP has been underway, major objectives of which are the privation of public sector banks and the development of non bank financial institutions to fill the gaps in the financial markets not served by the banks.

The period of FINSAP encompassed the following reforms:

Restructuring of financially distressed banks
The restructuring of the financially distressed banks took the form of addressing the financial, institutional, and managerial deficiencies in the banks. These measures included the following:
Reconstitution and strengthening of Board of Directors of affected banks
Closure of unprofitable branches
Reduction of operating costs through retrenchment of staff
Cleaning of the balance sheets of distressed banks by hiving off non-performing State-Owned Enterprise loans, non-performing loans granted to the private sector and loans granted by the Ghana Government.

The loans in these categories were redeemed, primarily in exchange for bonds. There were also a mixture of bonds and pre-determined injections of cash to the particular distressed bank in order to improve its liquidity, up-grade managerial capacity and deficiency of distressed banks as well as to intensify staff training of the affected banks.

Reforms to the prudential regulation and supervision
This entailed the revisions to the banking legislation with the promulgation of a new Banking Act in 1989 and a Non Bank Financial Institutions Act in 1993, the introduction of standardised reporting and accounting procedures and the strengthening of supervisory capacities in the BoG.

The 1989 Banking Law imposed minimum paid up capital requirements for Ghanaian and foreign owned commercial banks of ¢200 million and ¢0.5 billion respectively and ¢1 billion for development banks providing medium and long term finance for trade and industry. These remained so until the mid 1990s when high inflationary pressures compelled the BoG to make an upward revision of the capital requirements.

The Banking Law gives BoG the authority: to prescribe minimum liquid asset ratios of banks; to take action against a bank which it believes may be unable to meet its obligations to depositors or is not acting in the best interests of depositors or creditors.

The banking sector also witnessed the introduction of a standardised accounting system for the banks which includes explicit criteria for the classification of loans, provisioning for non-performing assets and the non-accrual of unpaid income. Banks were also required to submit to BoG, a variety of statistical data at regular intervals to ease supervision.

Financial liberalisation
Since 1987 financial markets have been progressively liberalised in Ghana. This entailed the removal of controls on interest rates and the sectoral composition of bank lending, and the introduction of market based instruments of monetary control. New financial institutions including several merchant banks with private sector participation have been licensed and some state owned banks being partially privatised.

The liberalisation of interest rates saw the removal of maximum lending rates and minimum time deposit rates. Controls on bank charges and fees were also removed in 1990. The bank specific credit ceilings, which had been the main instrument of monetary control during the ERP, were removed in 1992 and replaced with an indirect market based system of monetary control involving the weekly auctioning of T-Bills and other government and BoG securities.

This liberalisation has led to the emergence of new entries into the banking sector in Ghana, most of which are privately owned. Some of these newcomers include:
Continental Acceptances (now known as CAL Bank)
Ecobank Ghana Limited
First Atlantic Bank
Metropolitan and Allied Bank
Prudential
Meridien/The Trust Bank
International Commercial Bank

In addition to the new entry into the banking markets, other Non Financial Banking Institutions (NBFIs), including leasing companies, finance houses, building societies and savings and loans companies, have been established during the 1990s. Many of these NBFIs accept deposits and extend credit and therefore provide some competition for the services offered by the banks.

However, even though the banking industry had realised some improvements brought about by the financial sector reforms, the banking system was still shallow and performed very little intermediation between borrowers and savers in the private sector. . Bank deposits amounted to only 12.8% of GDP and the bank credit to the private sector amounted to only 5.3% of GDP in 1994. A major cause of this was the macroeconomic instability characterised by high rates of inflation which prevented the attainment of positive real interests.

There had been very little innovation among banks in terms of the range of instruments and services provided. Only very basic savings and lending instruments were available from the banks. Interest bearing chequeing accounts were generally only available to customers with very large deposits

The Banking industry also lacked adequate facilities to attract remittances or transfers from abroad as the process was slow. The banks were reluctant to furnish the recipients in Ghana with foreign currency, and moreover the exchange rates offered was uncompetitive compared to the foreign exchange bureaux rates. Hence, such transactions took place outside the banking sector.

In effect, the financial reforms had a limited impact on enhancing the efficiency of intermediation in banking markets.

In this regard, the newly enacted Bank of Ghana Ac 2002 (Act 612), which conferred operational independence on the Bank of Ghana, has been of assistance.

The Act redefined the objective of the Central Bank to be essentially price stability. The Act established the Monetary Policy Committee to formulate and implement policy in the areas of money, banking and credit with the aim of maintaining stable prices conducive to a balanced and stable economic growth.
Bank of Ghana has in the recent past introduced a number of policy reforms.

The objectives for such steps include among others:
Promoting efficiency and competition in the banking system;
Promoting financial deepening
Enhancing the transparency and competitiveness of the interbank money market.
Enhancing the development of the capital market.
Reducing asymmetric information

Asymmetric information is a major obstacle to lending, credit information, address of the borrowers and trust. As a result, Bank of Ghana instituted reforms addressing asymmetric information in the banking sector. These reforms include among others:
Credit Reporting Bill, which is now enacted
Publication of APRs
Publication of bank charges
Borrowers/Lenders Bill
Know Your Customer (KYC)
Anti-Money Laundering legislation

Other reforms embarked upon by Bank of Ghana include:
Abolition of secondary reserve requirements
Non-resident participation in domestic government securities
Foreign Exchange Bill
Payments systems reform
Collateral enforcement
Licensing of new banks
Re-denomination exercise
Universal banking
Central Securities Depository
Listing of government securities on the Ghana Stock Exchange
Risk based supervision
New Capital Accord (Basel II)

Conclusion
These reforms have brought about high competitiveness to the banking landscape in recent times as manifested in increased intermediation coupled with improved loan quality.

The reformation has also witnessed an improvement in bank credit to GDP ratio as the ratio stood at 18.5 percent in 2005 as against 4.7 percent in 1990.

Loan deposits ratio was 50.1 percent in 2002 as against 66 percent in 2006 and Non-Performing Loan was 19.6 percent in 2001 as against 11 percent as of October 2006.

Net foreign currency assets to shareholders funds were negative 9.4 percent in 2000 as against 43.4 percent in 2006.

The policy reforms further led to the proliferation and opening access of new more banks to a wider segment of the population in Ghana. Branch banking as well as the emergence of new more banks especially from Nigeria has become the order of the day in the banking industry. This led to an increase in banks branch network from 295 in 2003 to 377 in 2005.

Ghana Commercial Bank has the largest number of branches and the most widely networked bank among all the banks in Ghana. Creativity and innovation has also become part and parcel of banking in Ghana as many of them are introducing new, instruments, strategies and facilities to modernise and facilitate the banking process. Banks are creating new asset classes and products such as consumer loans, mortgages, Automated Teller Machine services, online telephone and internet banking, Mondex and many others.

The Banking awards instituted by Corporate Initiative Ghana in 2001is a measuring rod to see what banks are doing and also to stimulate debate over how banks can create social and environmental values without sacrificing profitability.

It also seeks to engender competition and efficiency among banks. Bank of Ghana has undertaken various reforms to support a competitive banking system. In the context of all these reforms banks will need to reinvent themselves in this new conducive but challenging environment.


References:
Martin Brownbridge and Augustine Fritz Gockel (1995) The impact of Financial Sector policies on Banking in Ghana

T.E. Anin (2000)

Dr Mahamudu Bawumia Deputy Governor, Bank of Ghana (2007). Banking in Ghana in the last 50 years- challenges and prospects. A Keynote Address at the Launch of Ghana Banking Awards.

World Bank (1994), Ghana Financial Sector Review: Bringing Savers and Investors Together. Report No 13423-Gh World Bank, Washington DC.