Is Ghana’s Banking Industry transformation Over?

Governor of Bank of Ghana, Dr. Ernest Addison

Accra, Ghana, March 8, 2019//-Ghana’s banking industry has passed through transformational phases since inception as a result of the gradual but steady implementation of financial service reforms.

The main purpose of implementing the financial reforms is to build a competitive and stable banking industry to enhance banks’ efficiency and ultimately economic growth and development.

Historically, banking as a business started in the country during the colonial era with the aim of providing financial services to British enterprises and the colonial administration.

In 1896, the Bank of the British West Africa – which later became Standard Chartered Bank, opened its first branch in Accra. The success of the bank attracted other foreign banks to begin operations in the then Gold Coast.

The Colonial Bank for instance started its operations in 1918 and later merged with Anglo-Egyptian Bank, the National Bank of South Africa and Barclays Bank and became known as Barclays Bank.

The Bank of the British West Africa and Barclays Banks were the only banks operating in the Gold Coast during the period, 1920 – 1950.

In 1953, the Bank of the Gold Coast was set up by the then Government and Alfred Engleston, formerly of the Bank of England.
With the passage of time, the Bank was split into two: the Bank of Ghana (BoG), operating as a bank of issue, to be developed into a complete central bank; and the Ghana Commercial Bank, to be developed into the largest commercial bank with a monopoly on the accounts of public corporation.
In July 1957, Alfred Engleston was appointed as the first Governor of the BoG that took over the management of the currency and in July 1958 it issued its first National Currency – the Cedi – to replace the old West African currency notes.

The Ghana Commercial Bank assumed the role and functions of Government bankers and began to take over the finances of most Government departments and public corporations.

The BoG quickly developed into a strong competitor of the expatriate banks by opening branches in most of the towns and centres in which they had been operating as well as moving into new areas such as the Ashanti and the Northern Regions.

New banks incorporated by legislation between the period 1957 to 1965 include: the Ghana Investment Bank as an Investment Banking Institution; the Agricultural Development Bank for the development of Agriculture; the Merchant Bank for merchant banking; and the Social Security Bank to encourage savings.

In conformity with the economic policy of the time all these institutions were incorporated as state-owned banks.
In 1983, in an attempt to reverse the gloomy economic situation, the Government, with the assistance and guidance of the International Monetary Fund (IMF), introduced the Economic Recovery Programme (ERP).

This signaled the end of Socialism in Ghana and provided a useful tool for economic development by embracing the market economy; privatisation; the liberalisation of trade and financial restrictions; and the divestiture of Government interests in public corporations.

Import licensing was quickly abandoned and exemptions were granted in relation to many of the restrictive clauses of the Exchange Control Act.

In addition, an Investment Code was enacted to make provision for the relaxation of many of the earlier restrictions in trade and finance and to encourage private investments. These newly adopted concepts were incorporated into legislation, particularly in regards to banking, non-banking financial institutions and securities.

The Banking Law of 1989 enabled suitable locally incorporated bodies to file applications for licences to operate as banking institutions. Subsequently, a number of corporate entities were licensed to operate as banks, including Meridien (BIAO) Trust Bank, CAL Merchant Bank, Allied and Metropolitan and ECOBANK.
Provision is made for the licensing of non-banking financial institutions under the Financial Institutions (Non-Banking) Law 1993 (P.N.D.C.L. 328).

This legislation makes provision for the licensing of non-banking financial institutions seeking to operate as, inter alia, discount companies, finance houses, building societies, or leasing and hire-purchase companies.

Such institutions now include the Home Finance Corporation which provides finance for the acquisition of houses and the City Savings and Loans Limited which grants various forms of financial assistance and accommodation to small scale business enterprises.

By the end of 1990, banks were able to meet the new capital adequacy requirements. Despite the fact that they offered some of the highest lending rates in West Africa, Ghana’s banks enjoyed increased business in the early 1990s because of high deposit rates.

The Bank of Ghana raised its rediscount rate in stages to around 35 percent by mid-1991, driving money market and commercial bank interest rates well above the rate of inflation, thus making real interest rates substantially positive.

As inflation decelerated over the year, the rediscount rate was lowered in stages to 20 percent, bringing lending rates down accordingly.
At the same time, more money moved into the banking system in 1991 than in 1990; time and savings deposits grew by 45 percent to ¢94.6 billion and demand deposits rose to ¢118.7 billion.

Loans also rose, with banks’ claims on the private sector up by 24.1 percent, to ¢117.4 billion. Banks’ claims on the central government continued to shrink in 1991, falling to a mere ¢860 million from ¢2.95 billion in 1990, a reflection of continued budget surpluses. Claims on nonfinancial public enterprises rose by 12.6 percent to ¢27.1 billion.

The Banking Act of 2004 led to the elimination of secondary reserves and adjustments in the minimum capital. The minimum capital was initially increased to GHS 60 million in 2007 and then in 2013 it was increased to GHS 100 million. The new Act also saw the introduction of the Universal banking license, which allows banking to provide various forms of banking services.

Developments on the banking plane in recent years led to the collapse of seven indigenous banks made the Central Bank to push ahead with efforts to strengthen the domestic banking sector, encourage the consolidation of local institutions and strengthen local players to better compete with foreign lenders and expand internationally.

According to the Central Bank the financial system was under a considerable state of distress, with banks that were not meeting the capital adequacy requirement and others whose capital was eroded with high non-performing loans.

“Some of these banks were insolvent and illiquid, others were solvent but illiquid. This state of affairs was largely a result of poor corporate governance, false financial reporting, and insider dealings,” it said.

It noted in a press release issued on January 4, this year that “the Bank of Ghana had in the past continued to provide liquidity support to these failing banks, without addressing the underlying problems that led to the illiquidity and insolvency of these institutions. In short, the financial system had reached a tipping point and we could not have assumed business as usual.”

Following a recapitalisation exercise that ended at the close of business on 31st December 2018, there are now twenty three (23) universal banks operating in Ghana.

These banks have all met the new minimum paid-up capital of GHC400 million. There were 36 banks operating in the country in July 2017.

The Central Bank explained that the recapitalisation exercise had repositioned the banking sector as better capitalised, liquid, stronger, and more resilient while the on-going strengthening of the regulatory and supervisory framework would ensure that the sector was well-governed, well-managed, and better supervised to restore and maintain much-needed confidence in the sector.

It hoped that:  shareholders of banks would exercise control over these institutions not for the benefit of shareholders and related and connected parties, but primarily in the interest of depositors, creditors, employees, and other stakeholders; bank boards will be composed of persons that are capable of exercising strong and independent oversight.

They are expected to ensure that the interests of all relevant stakeholders are protected; risk management will be integrated in the strategic focus of the governance and management of these institutions; compliance with regulatory requirements and ethical standards are embedded in overall risk management; and,  Central Bank’s supervisory systems, processes, and teams are better able to identify early warning signs, enforce regulatory requirements and ensure that prompt corrective action is taken by banks to recover quickly from any signs of distress.

The reforms has come with a huge cost to the Ghanaian tax payer

Speaking in parliament  recently President Nana Akufo-Addo said: “The clean-up has cost the national treasury GH¢12.7 billion, money we can ill afford, but which was necessary to sanitise the sector, minimise job losses, and protect deposits of one million, one hundred and forty-seven thousand, three hundred and sixty-six (1,147,366) Ghanaians and their businesses and the people they employed.”

To him, “The banking sector has emerged stronger from these developments, and inspired confidence in it. In all this, I have been anxious that our local banks are helped and given as much support as possible, which has been done, but l will not be on the side of criminal behaviour if that is discovered. I would urge that we are all patient for the investigations to be made in a calm manner.”

Financial experts say healthy competition within the banking industry should propel a downward trend in interest rates but rather there has been high interest rate spread suggesting high lending rates and low deposit rates – a situation that needs critical redress.

Another area they recommend for redress is customer satisfaction. Consumer expectations are not met on any given day. One major driving force in the banking industry under the current dispensation is the customer experience yet many banks are under pressure as they are unable to keep up with modern trends of service delivery as demanded by customers especially with regards to technology.

Banks are therefore compelled to comply by spending a large part of their discretionary budget on building process and systems to keep up with the ever increasing demand and requirements.

They also suggest that the appointment of politicians as directors and board members of banks should immediately be discouraged by the Central Bank.

This is really critical to the development of the local banks since there are several cases of people whose only qualification is party loyalty have been appointed as directors and board members of banks.

Banks are financial intermediaries that accept deposits from surplus spending units and channel these in the form of loan products to deficit spending units in the economy.

Since banks are financial intermediaries that accept deposits from surplus spending units and channel these in the form of loan products to deficit spending units in the economy experts have the opinion that its non-performance is disastrous to the economy of the country.

By Oppong Baah, African Eye Report

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