Financial System Stability Assessment Update

Since the 2003 Financial Stability Assessment Program (FSAP) update, Ghana’s financial system has undergone rapid growth and structural transformation. The authorities have been implementing reforms to enhance the financial system’s resilience to shocks and its contribution to growth. The vulnerabilities reflect the interplay of several factors, but state involvement is an important element. The other contributory factors include deficiencies in commercial banks’ risk management, supervision, and the insolvency regime. Additional recommendations are detailed in the Report on the Standards and Codes on Compliance (ROSC) with the Basel Core Principles (BCP).


Since the 2003 Financial Stability Assessment Program (FSAP) update, Ghana’s financial system has undergone rapid growth and structural transformation. The authorities have been implementing reforms to enhance the financial system’s resilience to shocks and its contribution to growth. The vulnerabilities reflect the interplay of several factors, but state involvement is an important element. The other contributory factors include deficiencies in commercial banks’ risk management, supervision, and the insolvency regime. Additional recommendations are detailed in the Report on the Standards and Codes on Compliance (ROSC) with the Basel Core Principles (BCP).

I. Background

A. Financial System Structure and Vulnerabilities

10. Ghana’s financial system is dominated by foreign-owned banks. Commercial banks account for 75 percent of the total assets of the financial system, pension funds follow distantly with a 12 percent share, and the insurance sector is small with 4 percent (Table 1). Of the 26 commercial banks operating in Ghana, 13 are subsidiaries of foreign banks and their market share is estimated at 51 percent of bank assets. British banks dominate, but the combined share of banks from the Africa region is larger, particularly from Nigeria and Togo (Figure 1).2 Given the dominance of foreign banks, cross-border contagion is an important risk.

Table 1.

Ghana: Structure of the Financial System, 2000–10

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Sources: Bank of Ghana, National Insurance Commission, Securities Commission, Ghana Stock Exchanges and SSNIT Notes:

This includes banks where the state has majority shareholding, directly or indirectly through equity holding by the government, BOG and SSNIT. It does not include Ghana International Bank in which the BOG also holds 51 percent shareholding.

Figures for 2000 were not available so they have been extrapolated from the 1999 figures.

GDP has been substantially revised upwards and this has affected ratios from 2007 onwards that are scaled by GDP.

AG denotes Ashanti Gold

Figure 1.
Figure 1.

Ghana: Banking System Structure and Trends, 2000–10

Citation: IMF Staff Country Reports 2011, 131; 10.5089/9781455282579.002.A001

Sources: Bank of Ghana and IMF staff estimates.

11. The domestic component of the banking system is dominated by SBs. The state has a controlling interest in five commercial banks, through direct and indirect shareholding by the government, the BOG, and the state-controlled pension fund—the SSNIT. 3 The SBs account for 29 percent of banking system assets—one of the highest in the Sub-Saharan Africa region. Therefore, the interaction between sovereign and banking risks is high. In particular, the government has tended to use SBs to finance extra budgetary expenditures and the poor performance of SBs has created contingent liabilities for the government. High fiscal deficits have led to arrears that contributed to NPLs in banks. In addition, the conflict of interest created by the BOG’s role as a shareholder and as a regulator has undermined supervision.

12. Domestic financial conglomerates are increasing in importance even though they do not yet have a dominant presence. The exact scope of conglomeration in Ghana’s financial sector is not fully known. However, at least nine banks, which account for 53 percent of the banking system assets, have subsidiary securities firms and, in selected cases, industrial and insurance companies. Since the banks are not yet supervised on a consolidated basis, and there is no mapping of shareholders and common directors, it is possible that affiliate companies exist, thus, allowing related party lending to occur unnoticed.4 These growing inter-linkages increase the potential for risks to have a system-wide impact.

13. The financial sector has grown rapidly, although the growth has not had the intended effect of reducing intermediation costs. Total financial system assets increased more than 13 fold over the last ten years to an equivalent of about US$16 billion (Table 1 and Figure 1). The growth has been underpinned by an increase in the number of players in the banking, insurance, capital markets, and microfinance sectors. However, while private sector credit increased,5 a significant segment of the economy continues to have limited access to finance. The competition also exerted more pressure on staff and funding costs while lending rates have remained high.

14. Concentration has declined in the banking sector but it remains very high in the rest of the financial industry. The market share of the five largest banks declined from 61 percent at end 2005 to 46 percent at end 2010, in part reflecting the licensing of several banks (Figure 1). In the insurance sector, the number of companies operating almost doubled. However, five out of 23 non-life insurance companies continue to write about 78 percent of the premiums and five out of 19 life insurance companies write 68 percent of the total life premiums. Similarly, in the capital markets, one company (AngloGold Ashanti) accounts for 67 percent of the stock market capitalization. The SSNIT, the main provider of pensions, accounts for over 80 percent of assets under management. Given the high degree of concentration, the stability of the industry could be impacted by developments in a small number of companies.

15. There are also important risks inherent in the operations of banks and in the structure of their balance sheet and the profit and loss accounts. Commercial banks are highly exposed to credit risk, since lending accounts for the bulk of assets and it has grown in an environment of weak credit risk management and enforcement of creditor rights.6 Concentration risk is high with large exposures to single obligors and economic sectors (Figure 2). In addition, banks are increasingly lending to vertically integrated firms and to their employees. The cost structure of banks also exhibits rigidities that reduce banks’ flexibility to respond to macroeconomic changes, resulting in high lending rates that respond slowly to changes in the policy rate.7 The increased reliance on information technology (IT) for service delivery has increased exposure to operational risk.

Figure 2.
Figure 2.

Ghana: Bank Balance Sheet and Income Structure, 2010

Citation: IMF Staff Country Reports 2011, 131; 10.5089/9781455282579.002.A001

Sources: Bank of Ghana and IMF staff estimates.

16. The government’s dominance in economic activity, against the backdrop of weaknesses in fiscal management, further increases vulnerabilities in the banking sector. State-owned enterprises (SOEs) and many small-and medium enterprises (SMEs) rely heavily on business from the government. Consequently, the government’s accumulation of payment arrears to contractors and other service providers has undermined their capacity to service their bank loans and created NPLs across the industry. The team had estimated that 46 percent of the NPLs, reported at end-March 2010, were directly or indirectly linked to government arrears. The government subsequently paid off the bulk of the arrears identified at the time of the FSAP, but new arrears have since emerged, but their implications for NPLs in the banking sector is yet to be ascertained.

B. The Macroeconomic Environment and Risks

17. Developments in Ghana’s financial sector have been underpinned by mixed macroeconomic performance (see Figure 3). Prior to the crisis, Ghana registered sustained high GDP growth, a stable exchange rate, and a favorable balance of payments position, while the BOG abolished secondary reserve requirements—all of which created favorable lending conditions. However, in the run up to the 2008 elections, the macroeconomic environment deteriorated rapidly, reflecting a confluence of a food and energy crisis and an expansionary fiscal policy. As fiscal deficits widened, inflation accelerated, interest rates rose to around 30 percent, investors became skittish and began to exit the debt market, and the exchange rate began to depreciate, thereby creating conditions for asset price deterioration.

Figure 3.
Figure 3.

Ghana: Selected Economic Indicators, 2004–10

Citation: IMF Staff Country Reports 2011, 131; 10.5089/9781455282579.002.A001

Sources: Bank of Ghana and IMF staff estimates.

18. The global financial crisis compounded incipient pressures in the domestic economy resulting in a massive deterioration in the quality of banks’ assets. In the aftermath of the crisis, Ghana’s GDP growth decelerated significantly; inflows from portfolio capital and remittances declined; and the depreciation in the exchange rate accelerated.8 Concurrently, the government was unable to make payments to contractors and other service providers, and this in turn, created NPLs across the banking system. The deceleration in growth also occurred mainly in the non-cocoa/gold sectors which constitute the bulk of the banks’ loan portfolios.9 This added to NPLs and also exposed weaknesses in loan underwriting standards.

19. More recently, the macroeconomic environment has improved which should be favorable for the banking sector. GDP growth is estimated at 6.6 percent in 2010 and projected to increase further to 14 percent in 2011. The start of oil production in 2010 has reinforced the fiscal and external outlook. The financial sector could benefit from the downstream activities from the oil sector. Liquidity in the banking system has increased substantially and the pace of lending to the private sector has recovered in the first half of 2010.

20. However, a number of downside risks stemming from the macroeconomic environment persist. The potential for expenditure overruns is high ahead of elections in 2012, and fiscal slippages that lead to an accumulation of new arrears could negatively impact the banking sector. High banking system liquidity—resulting from a combination of increased capital inflows, high commodity prices and fiscal imbalances—could encourage greater risk taking by banks, in light of the recent increase in minimum capital requirements. Tail risks such as a shock to cocoa prices, could have wide repercussions for fiscal revenues, NPLs, and the exchange rate that could feed back to the banking sector through increased credit risk. These risks are further elaborated in the Risk Assessment Matrix attached as Appendix III.

II. Overall Banking System Stability

A. Banking System Soundness and Resilience

Current condition

21. Official financial soundness indicators do not provide an adequate picture of the soundness of the banking system due to weaknesses in banks’ financial accounts In particular, the mission noted a variety of practices that result in an overstatement of capital, profitability, and liquidity in the banking sector. These include: (i) the misclassification of NPLs particularly those linked to government arrears; (ii) under-provisioning for NPLs; (iii) the treatment of restructured loans as current; (iv) accrual of interest on NPLs; and (v) the reporting of encumbered treasury securities among liquid assets.

22. Nevertheless, notwithstanding data weaknesses, capital in the banking system has on aggregate increased and liquidity remains high (Table 2). The high capital levels mainly reflect the recent increase in minimum capital requirements and the significant and increasing share of zero risk-weighted treasury securities.10 The substantial liquidity in the banking system reflects a combination of intensified deposit mobilization efforts by banks, elevated government expenditures and increased foreign inflows, most notably foreign direct investment, remittances, and portfolio capital flows. Banks have also remained largely profitable.

Table 2.

Ghana: Financial Soundness Indicators, 2003–10

(In percent)

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Source: Bank of Ghana.

This figure to some degree overstates bank profitability in so far as it includes interest accrued on loans that have not been performing for years.

This figure includes assets that are encumbered and therefore overstates the liquidity position to that degree.

The CAR was adjusted for lending to shareholders and to take account of the loans that were previously inappropriately classified as current.

The NPL ratio reflects the re-classification of exposures to OSNOR plant, Nyame Iye Cold Storage, the AU Development Consortium, and the exposure to the National Youth Employment Program (NYEP).

23. However, NPLs are very high across the industry and pockets of fragility remain. At end December 2010, NPLs were estimated at 17.6 percent and several banks, including systemically important domestic banks and subsidiaries of reputable international banks, reported higher NPL ratios in the range of 20–40 percent. Though improving, misclassification and under-provisioning for loans is still a common occurrence among banks. Adjustments to the figures made by the team for some of the obvious misclassifications and lending to shareholders, suggest that some of the small and medium sized banks may be undercapitalized. The restructuring of a couple of banks previously identified weak banks is yet to be completed.

24. The performance of the banking sector and its ownership structure compares unfavorably with peer countries (Figure 4). Aggregate capital adequacy levels and bank profitability are in line with other countries, but the NPL ratio is much higher than most peer countries. As for the ownership structure, the share of foreign banks is comparable to most other countries but state ownership of banks is among the highest in the region as is the ownership of commercial banks by the central bank.

Figure 4.
Figure 4.

Ghana: Comparative Structural and Financial Indicators

Citation: IMF Staff Country Reports 2011, 131; 10.5089/9781455282579.002.A001

Sources: IMF staff estimates and various country authorities.

Contributory factors

25. The vulnerabilities in the banking sector are attributable to the interaction of several factors, but government involvement in banks’ operations is an important element. SBs account for a large share of banking system assets and this group of banks has underperformed due to conflicting development and commercial banking objectives that have led to weaknesses in lending practices. In addition, government domestic arrears have been a recurring source of banking system vulnerability as they undermine capacity of providers of services to the government to repay their bank loans in a timely manner. 11 Furthermore, since term deposits are benchmarked to treasury-bill (t-bill) rates, high fiscal deficits affect banks’ funding costs, contribute to high lending rates, and erode capacity to service debts.

26. Weaknesses in commercial banks’ risk management and in supervision have also been important factors. Commercial banks’ internal controls are generally lax and risk management practices have not kept pace with the growth of the industry and the changing risks. Though government domestic arrears have been a recurring theme, banks continue to rely on implicit government guarantees and do not take additional security. In addition, the intensification of competition and increased liquidity has engendered higher risk taking and inadequate attention to required controls. Regulatory forbearance also enabled banks to build loan concentrations above regulatory limits and to maintain inadequate provisions. Deficiencies in prudential data collection and analysis have prevented identification of systemic risks.

27. Banks in Ghana have high operating costs and rigidities in their cost structure that reduce their flexibility to respond to a changing macro-environment. Overhead costs are high and comprise mainly of staff related expenses (50–55 percent) and growing administrative costs (25–30 percent).12 The high administrative costs are partly attributable to the rapid expansion of banks’ branch networks as the banks competed to gain market share and to tap lower cost deposits. By the same token, demand for qualified personnel outstripped supply thereby pushing staff costs up. The need for large branch networks reduces scope for significantly reducing administrative costs in the immediate term.

28. The deficiencies are exacerbated by the weak environment for enforcing creditor rights. Despite the establishment of commercial courts and the collateral registry, banks reported experiencing prolonged delays in foreclosing on collateral. In particular, the complex and time consuming procedures for taking possession of collateral pledged as security for loans result in low debt recovery rates.

Resilience of banks to shocks—Stress test results

29. The mission used stress testing to assess the resilience of the banking system to shocks based on bank-by- bank data for end-December 2010. The stress test results are summarized in Table 3 below and the methodology and assumptions are outlined in Appendix IV. 13 The results should be interpreted as baseline, since feedback loops and other interactions that have potential to magnify the shocks, are not adequately reflected in the analysis due to data limitations and the absence of a macro consistent model.

Table 3.

Ghana: Selected Stress Test Results 1/

(In percent, unless indicated otherwise)

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Source: IMF staff estimates.

The table reports the stress test results for the banking system and for various peer groups formed by asset size and ownership.

Adjusted by the mission to address some of the identified loan misclassifications and insider lending.

Nonperforming loans currently classified as substandard and doubtful loans migrate to loss.

In addition to the baseline migration of NPLs, 11 percent of current loans migrate to loss.

The scenario implies that NPLs increase by approximately 50 percent at end-March 2012 relative to March 2010 levels. The currency is assumed to depreciate by 15 percent and lending rates to decline by approximately 200 basis points relative to March 2010 levels.

Liquid assets in domestic currency, including cash, balances with BOG and t-bills.

30. The results of updated stress tests indicate that stability risks in Ghana’s banking system have been substantially reduced, but underlying vulnerabilities remain. At the end of December 2010, all but one bank complied with the capital adequacy requirement of 10 percent and only two small banks fell short of meeting the minimum capital requirements. Three banks became undercapitalized when the accounts were adjusted for under provisioning and insider lending, but the degree of undercapitalization is modest and the share of assets for the undercapitalized banks is small. These results indicate a significant improvement compared to the stress-tests performed by the mission in August 2010, reflecting the repayment of government related NPLs, an intensification of debt recovery efforts by banks, and an increase in capital as part of banks’ efforts to comply with the new minimum capital requirements. The improvements, however, seem tenuous as the tests show that modest increases in lending that shifts assets from low to higher risk weighted assets (RWA) could result in several banks failing to comply with capital requirements.

31. Credit risk and concentrations in loan portfolios continue to present a major risk to banking system stability. At least 10 banks with an asset share of 41 percent continue to have concentrations where the default of a single obligor would result in them breaching the CAR and two of them, with a market share of 16 percent, would become insolvent. Similarly, eight banks with a market share of 27 percent would breach the capital adequacy requirements, if loans that are currently classified as substandard and doubtful migrate across the transition matrix, and 11 percent of current loans become nonperforming.

32. Liquidity risk is less of a systemic threat but there are some pockets of vulnerability. Updated stress tests indicate that two banks remain highly vulnerable to liquidity risk. These two banks depend heavily on public sector deposits to finance their asset growth, and if the central government and public institutions were to withdraw their deposits from commercial banks, they could see their liquid asset ratio falling below 10 percent. More generally, small banks are more exposed to liquidity risk than big banks. This is because big banks have a network of branches through which they are able to tap low-cost deposits, while smaller banks rely heavily on public sector and other wholesale deposits. Some of the smaller banks also use their t-bills as security for corporate deposits and the encumbered assets would not be available to meet deposit withdrawals.

33. Cross-border contagion is considered by the industry to be an important risk, but the mission was unable to quantify its potential impact. Data on the banks’ intra-group exposures was not available. In addition, the recent turbulence in Nigerian banks could not provide a historical perspective on the potential cross-border contagion, since the parents of banks currently in Ghana were not directly affected. Tests undertaken by the mission indicated that one bank had significant direct exposures to the parent bank. However, discussions with the banks suggested that the collapse of a parent bank could easily undermine confidence in the subsidiary and trigger a deposit run on banks considered to be of the same asset class.

34. Market risk is not significant but indirect credit risk has not been quantified. Stress tests performed by the team showed that direct balance sheet effects of an exchange rate change were minimal, and latest data show that banks have continued to maintain low open positions. Similarly, banks exhibit resilience to changes in interest rates, in large part because most lending is at variable rates. However, exchange and interest rate changes can erode the incomes and debt service capacity of borrowers, thus, the balance sheet of banks would be indirectly affected through increased credit risk.

35. Macroeconomic risks pose a greater threat because of the potential simultaneous impact on asset quality, the exchange rate, interest rates, and liquidity. The two possible scenarios of a fiscal deterioration and a shock to cocoa prices, yield results that were similar in magnitude. Both have direct implications for interest rates, exchange rates and NPLs, but the greatest threat comes from a fiscal deterioration given the higher probability of occurrence.

Addressing the vulnerabilities

36. The authorities have taken steps to mitigate immediate risks to financial stability. The government recently repaid the bulk of its arrears that contributed to NPLs in the banking sector and management of SBs has been strengthened. Commercial banks raised additional capital and some were acquired by stronger banks, as part of banks’ efforts to comply with the new minimum capital requirement that became effective in December 2010. There have also been some efforts by banks to appropriately classify and provision for identified NPLs and to intensify debt recovery efforts. These actions have significantly reduced the incidence of undercapitalization in the banking system. The decline in t-bill rates has also helped reduce funding costs, while the banks continued to benefit from high interest rates on their holdings of long-term bonds and loans.

37. However, notwithstanding the recent steps, underlying vulnerabilities identified by the FSAP team remain. The repayment of government arrears and recapitalization of banks only achieves temporal balance, and long-term stability will require improved risk management by commercial banks, strengthened supervision and better risk analysis by the regulator, and an arm’s length relationship between SBs and the government. Government arrears will also continue to be a lingering risk to banks’ asset quality until fiscal management is improved. Further progress is also needed to complete the resolution of remaining fragile banks and to repay the remaining government related arrears which continue to be significant for a few selected banks. The capital raised by some of the banks needs to be verified to ascertain its quality and availability.

38. There is, therefore, a need to build on the current achievements and expedite reforms to strengthen controls and risk management at commercial banks. Commercial banks should be immediately required to strengthen their internal controls and risk management practices, including strengthening their credit risk assessment, legal perfection of collateral, monitoring, and collection systems as well as debt collection. In selected cases, the banks will need to undertake balance sheet restructuring and develop credible business models. The BOG should issue guidelines on risk management practices and corporate governance and rigorously enforce them as well as assess the viability of banks’ business models as part of the regular oversight.

39. There is also a need to address regulatory and supervisory gaps more comprehensively. The BCP assessment provides a detailed review of the gaps and shortcomings in the regulatory framework and in supervisory practices.14 To avoid the potential for disorderly exit of banks, the Banking Act needs to be amended to give the BOG adequate options to resolve banks, such as including powers to undertake purchase and assumption. In addition, priority should be given to minimizing regulatory forbearance, addressing regulatory gaps, strengthening the crisis management framework, and enhancing both the supervisory resources and expertise. Central bank independence should be further strengthened by removing the appeal provision under which the BOG decisions can be overturned by the minister and by reducing the BOG’s equity stakes in commercial banks. Actions are also needed to: (i) strengthen licensing procedures; (ii) enforce accounting and auditing regulations; and (iii) address weaknesses in the collection and analysis of data for offsite surveillance and risk analysis. Given the increasing importance of conglomerates and foreign banks, there is need to strengthen consolidated supervision and cross-border supervision.

40. The recent decision to establish a Financial Stability Department is a positive development that should help strengthen the macroprudential framework for systemic risks analysis. Though the BOG has been undertaking some analysis of financial stability, the report has been very limited in its scope with inadequate data to undertake comprehensive analysis of risks in the banking system and the broader financial system. The work has been under resourced with considerable scope for capacity building in techniques of analysis, including stress testing and other early warning systems. It is, therefore, important that the authorities build on the recent progress to expedite the production of a comprehensive Financial Stability Report on a regular cycle that helps identify incipient problems and facilitates timely action. Concerted actions will be needed to train the staff, develop adequate data base for analysis, and establish a communication strategy.

41. Second-generation reforms are needed to make the financial infrastructures operational and efficient. Appropriate enforcement mechanisms are needed to ensure compliance with the International Financial Reporting Standards (IFRS) to improve financial reporting. Operations of the credit registry could be improved by enforcing lender compliance with the Credit Reporting Act and strengthening oversight of data quality. Further reforms are needed in the legislative and institutional framework for insolvency and creditor rights to address weaknesses in the network of registries and improve the efficiency of commercial courts. In particular, the judicial system will need to fast-track dispute resolutions and send a message of zero tolerance in order to discourage a culture of nonpayment of obligations.

42. Long-term stability of the banking sector will require a paradigm shift in state involvement in the financial sector. The FINSSIP, which is currently under discussion, provide a good opportunity to develop a clear policy and strategy for revisiting the current state involvement in the banking industry. In particular, the BOG needs to develop a credible exit strategy for its shareholding in commercial banks, as the recent decision to transfer of BOG’s shares into a trust does not address the conflict of interest arising from its position as the regulator for banks. The government should also preferably divest its shareholding in the banks or at least separate the ownership from management so that the banks operate on commercial basis. Development-oriented banking activities should be financed using specialized institutions that have appropriate liability structures and do not put depositors’ funds at risk. The conflict of interest created by the majority shareholding in banks by the SSNIT and its role as custodian of pension funds also needs to be addressed.

B. The Regulatory and Supervisory Framework

43. The BOG has been making efforts to align its regulatory and supervisory framework with international standards, but important gaps remain. Since the 2003 FSAP Update, several legislative improvements have been introduced. Effort was also made to improve risk-based supervision as a precursor to implementing Basel II, which is slated for introduction by June 2012. However, despite major accomplishments on the legislative front and the efforts to strengthen supervision, the level of non-compliance with Basel Core Principles is high. Enforcement of prudential regulations was also found to be weak.

44. A major reform effort is, therefore, still needed to strengthen banking supervision as detailed in Appendix I and VI. In particular, there is a need to address the deficiencies identified in risk management regulations, supervisory response times, and cross-border supervision. Current efforts to issue regulations, guidelines and examination manuals should be expedited and a comprehensive work program should be developed. Some risks in the banking system, such as interest rate risk and information technology (IT) operational risk, will need to be properly addressed and in-house expertise will need to be developed. The planned adoption of the standardized approach of the Basel II framework should not proceed without meeting certain pre-conditions. The transition to Basel II will require sound project management by the BOG, including extensive technical analysis and some policy decisions.

C. Systemic Liquidity Management and Financial Markets

45. The BOG has significantly strengthened its liquidity management framework. Currently monetary policy is conducted within a “lite” inflation targeting framework. The BOG has an adequate range of instruments to withdraw and inject liquidity.15 A clear and well documented liquidity forecasting framework provides a basis for conducting open market operations. Auctions for government securities are transparent and well managed with volumes now set consistently throughout the quarter. Open Market Operations (OMOs) are conducted to manage day-to-day liquidity and are underpinned by a flexible exchange rate regime.

46. Nevertheless, there is scope for further improvement and some of the practices deserve to be discontinued. The penalty rate is low and the current practice of lending without collateral exposes the BOG to counterparty risk. Improvements are needed in forecasting government expenditures to minimize forecasting errors in liquidity management.

47. Further efforts are needed to also deepen the financial markets. The primary market in government securities operates well, but there is little secondary trading. The absence of a secondary debt market necessitated the BOG to discount bills for foreign investors who needed to exit the market during the financial crisis and while this did not impact the stability of the financial system, it complicated liquidity management.16 There is, therefore, a need to create an enabling environment for the development of a secondary market. The authorities’ recent decision to reduce the number of primary dealers (PDs) and to require them to underwrite the auctions and provide market-making services is a positive development that should contribute to the development of the market. Consideration should also be given to the issuance of benchmark bonds; and the reopening of bond issues.

48. The interbank money market has continued to grow but there is a need to address the high counterparty risks which undermines its efficient functioning and development. All the banks participate in the markets and volumes have been increasing, but almost all transactions are overnight and secured. Banks have a conservative approach in allocating unsecured credit lines and there are selected cases where the banks would not trade even with security. Improved regulatory oversight that enhances the stability of banks could improve confidence and help market development.

49. The foreign exchange interbank market is very small and illiquid. The interbank foreign exchange market is a hybrid of wholesale and retail trading comprising the BOG, the commercial banks, corporate entities, importers, exporters, and individuals. Two public institutions are also prominent on the banks’ foreign exchange market. The existing interbank (wholesale) foreign exchange market is not very active. There is need to develop a foreign exchange interbank market and to consider policies that can lead to greater inflows into the market to increase depth.

50. Liquidity management has been well supported by the RTGS system but further improvements are needed for it to operate efficiently and minimize settlement risk. There is need for the BOG to refine the intraday facility by linking the RTGS to the CSD in order to reduce the delays caused by the collateral management process.

51. BOG’s role as LOLR needs further improvements. The BOG has legal powers to provide exceptional liquidity assistance against collateral, including government securities. However, there are no clear implementing guidelines to guide the BOG in determining whether, when, to what extent, or under what conditions it should provide support to distressed financing institutions, including deposit-taking NBFIs. The mission, therefore, recommended that the BOG expeditiously develop comprehensive LOLR policies, guidelines, and procedures. It also recommended prohibiting the BOG from lending to insolvent banks.

D. Financial Safety Nets and Crisis Preparedness

52. Several important elements of the crisis prevention and management framework are not in place. In addition to the weaknesses identified with respect to the LOLR, Ghana does not have: (i) adequate resolution options; (ii) a deposit insurance scheme; (iii) formal procedures and contingency plans for information sharing and coordination of activities; and (iv) procedures for communication across different responsible authorities at home and abroad.

Bank resolution

53. The BOG has an array of legal instruments and enforcement powers to handle troubled institutions.17 It has powers to take remedial measures against institutions under stress, appoint an advisor to bank management, appoint a conservator, revoke the license of a bank, declare a moratorium, and appoint a liquidator. It also has blanket powers to “facilitate mergers, wind up or take whatever action is needed” (Banking Act, section 28).

54. Nevertheless, the legal framework could benefit from further strengthening and clarity. The remedial powers of the BOG, specified in Article 60 (b), could be expanded to include additional provisions as detailed in Appendix I. The blanket provision exposes the BOG to potential legal challenges from shareholders of the bank and can lead to inconsistencies in interpretation and implementation by the supervisors, thus it is important that the law enumerates the BOG’s powers and the conditions under which the powers can be used. In particular, the BOG should have powers such as purchase and assumption that will enable it to intervene in insolvent banks without consent of court and current shareholders, subject to appropriate safeguards that protect shareholder and creditor rights if the bank is liquidated.18

55. Ghana’s regime for prompt corrective action also needs strengthening. The provision that allows the BOG to revoke a license when all the capital is exhausted is too lax and the BOG’s ability to take timely action could be undermined by Article 62 which gives the banks six-months to remedy capital shortfalls. Potential contradictions in the legal provisions should be addressed and the BOG should be able to deploy its resolution powers and override shareholders and creditors rights prior to exhausting the capital. The mission recommended enforcing prudential regulations and to increase the capital adequacy trigger for intervention to about 4 percent.

56. Bank resolution capability will also need to be strengthened. Operating and implementing the legislation entails some practical challenges. Special bank resolution regimes and legal devices designed to contain the systemic effects of financial firm failure (netting, financial collateral, settlement finality, etc.) all essentially operate as a derogation from a country’s ordinary insolvency laws. Staff of the resolution authorities as well as others that may be involved (e.g., in collateral registries) will, therefore, need considerable insolvency expertise. The current weaknesses in the legal framework in terms of insolvency and creditor rights suggest a need for capacity building and external expertise can be used in the interim.

Deposit insurance

57. The mission welcomes the authorities’ interest in introducing a deposit insurance scheme but cautions that several important preconditions would have to be met.19 In particular, the authorities should give priority to bank resolution issues to avoid introducing distortions in the incentive structure for banks. The design of the scheme should seek to minimize moral hazard and adhere to the principles outlined by the Basel Committee on Banking Supervision (BCBS) and the International Association of Deposit Insurers (IADI). In any event, the deposit insurance should not substitute for the need to strengthen supervision or to take timely remedial actions.

Contingency crisis management arrangements

58. Ghana does not yet have an established mechanism to deal with a systemic crisis. Some initiatives have been undertaken to establish relationships with foreign supervisory agencies through the adoption of memoranda of understanding (MOU). However, the MOUs only cover five Nigerian banks and there are no arrangements with supervisors of the other eight foreign banks. The MOUs also do not cover essential elements for crisis management, such as mutual communication of early warning triggers and indicators or the criteria for burden sharing and emergency liquidity assistance.

59. The mission, therefore, recommended establishing a framework for managing financial crises at the domestic, regional, and international level. The plan should provide clear principles, policies, and procedures for handling a systemic crisis. To ensure an orderly exit, the framework should clarify the following key elements: (i) any available form of government intervention or assistance to banks and depositors; (ii) appropriate funding structures; (iii) the responsibilities for the various public and private sector stake-holders, including the BOG and the MOF; (iv) the role of the planned deposit protection scheme; (v) the role of liquidators; (vi) the role of the courts; and (vii) other government action. The design of the framework should involve high level officials to ensure timely decision making. At the regional and international level, crisis management will require coordination of home and host supervisors and more effective information sharing.

III. Cross-Cutting Issues

A. The Social Security National Investment Trust Dominance in the Financial Sector

60. The SSNIT holds a central position within the financial sector. It is currently the main provider of pensions in Ghana. It also has significant shareholding in 9 of the 26 commercial banks, majority shareholding in two of the banks, and holds a significant level of deposits in the banking system. In the capital markets, it holds positions in 22 of the 34 companies listed on the stock exchange and accounts for over 81 percent of local funds under management. 20 The SSNIT also holds equity in two insurance companies, including one of the largest insurance companies. It also acts as a primary dealer in the t- bill market.

61. SSNIT’s sizeable portfolio in a thin market introduces distortions that deserve careful consideration. Currently, the SSNIT has majority shareholding in two of the problem banks which creates a conflict with its role as custodian of pension funds. The SSNIT does not also seem to have clear exit strategies from investments. The current concentration of SSNIT’s deposits in the small and weak banks raises questions about its contribution to efficient intermediation.

B. Anti-Money Laundering and Combating Financing of Terrorism

62. Ghana has put in place most of the basic elements for a comprehensive AML/CFT framework, but it is not yet compliant with most core and key FATF recommendations.21 The main deficiencies identified related to the absence of an implementation law and regulations particularly in relation to CSD, record-keeping, and the absence of an operational Financial Intelligence Unit. The authorities have begun to address identified deficiencies, but the agenda for further action is large. Compliance with the FATF standards will depend on the expeditious implementation of the national action plan, budgetary allocation for implementation, and training.

IV. Structural and Developmental Challenges

A. Long-Term Finance

63. The nonbanking sector has registered rapid growth, but long-term finance remains scarce. The sectors exhibit common deficiencies in regulation, supervision, and supporting financial infrastructures.

Capital markets

64. The Ghanaian securities industry has not played a major role in resource mobilization and long-term financing of the economy. Equities dominate the industry and the debt market consists predominantly of government securities. Though the industry has grown rapidly, the market lacks depth and liquidity, in part due to low float. Only 34 companies are listed. The corporate debt market is at a nascent stage with a single outstanding issue of about US$3.9 million and a few privately placed bonds.22 Collective investment schemes (CIS) are gaining importance. Overall, the market is very concentrated (Figure 5).

Figure 5.
Figure 5.

Ghana: Structure and Performance of Capital Markets, 2003–10

Citation: IMF Staff Country Reports 2011, 131; 10.5089/9781455282579.002.A001

Sources: Ghana Stock Exchange and Securities Commission.

65. The authorities have been implementing reforms to develop the market, but important challenges remain. A new automated trading system and the clearing and settlement systems for equities and for government securities have been put in place. The PD system was recently reformed to reduce the number and improve capitalization. However, regulation and supervision is inadequate and minimum capital is too low. The SEC has limited capacity to regulate the broadening market due to a public sector recruitment freeze and the inability to attract and retain competent staff due to low remuneration. The SEC’s independence is also compromised by inadequate funding. Further, none of the post trade infrastructure was achieving DVP, thus introducing settlement risk. Further development of the market will require efforts to strengthen regulatory oversight and improve efficiency and transparency (see Appendix I for detailed recommendations and the technical note for more detailed analysis).

Insurance industry

66. The insurance industry faces important developmental challenges. Despite a rapid growth in the number of players, penetration ratios are low due in part to low incomes, high illiteracy levels, dominance of the informal sector, poor image of insurance companies, and inadequate public education. Minimum capital requirements for both life and non-life are low by international and regional standards and encourage entry of companies with insufficient start-up capital to generate profitable business volumes.23 The widespread practice of discounting premiums results in the companies not being able to honor claims. The level of unpaid premiums has reportedly increased from 25 percent to 45 percent over the last five years which is adversely affecting the profitability, liquidity, and solvency of companies. Regulation and supervision have not kept pace with industry growth and practices. Other challenges facing the industry are the high expense ratio, incidence of fraudulent claims, inadequate technology, and inadequate supply of skilled personnel.

67. To ensure viability of the industry, regulation and supervision should be strengthened. Both supervisory resources and expertise need to be increased. Minimum capital requirements should be increased to at least US$5 million for life companies. The National Insurance Commission (NIC) has recently introduced an initiative under which insured parties must either pay cash up front or enter into a credit agreement, thus NIC should monitor the level of outstanding premiums and use it to prioritize its onsite activity. The NIC should also consider requiring companies to report instances where insured parties have defaulted to the Credit Bureau and to pay attention to ensuring that premiums are set at economically sustainable levels.

Pension funds

68. The shift to a three-tier pension system is welcome but further reforms are needed to address gaps in the Pension Act. The pension reforms are expected to break SSNITs virtual monopoly, improve benefits, and extend coverage voluntarily to the informal sector. However, the act needs to (i) incorporate the IOPS principles; (ii) increase the operational autonomy and accountability in the appointment and removal of members of the Board as well as ensure financial independence in the provision of budgetary resources; (iii) introduce implementation regulations and guidelines; (iv) clarify the legal status of the guidelines as enforceable instruments; (v) provide guidelines governing the relationship between trustees and third parties; (vi) prohibit approved trustees investing in the securities of a company that has sponsored the formation of the scheme; (vii) specify the minimum terms of outsourcing contracts and give the supervisor access to third parties; and (viii) expedite plans to enter into MOUs with the relevant supervisors for exchange of information.

B. Access to Financial Services

69. Despite recent gains, access to financial services is still limited and intermediation costs are high due to a range of structural and other constraints. This applies to a broad spectrum of products including microfinance, housing, agriculture finance, and venture capital. In particular:

  • The microfinance sector has been expanding without a regulatory framework, the micro finance institutions (MFIs) are financially weak and undercapitalized; and the borrowers are highly indebted.

  • The housing sector faces a supply shortage which has fuelled house price inflation due to interlinked challenges such as problems with land titling and limited access to finance.

  • The high risk embedded in agriculture finance has discouraged private sector involvement while government programs have been prone to repayment problems and have also tended to erode credit discipline across the value chain.

  • Mobile payment services are fairly new and have not yet achieved the objective of extending payment services to outlying areas and un-banked communities.

  • Venture capital is not yet a major source of financing in Ghana, in part due to a shortage of skills, inability to attract private sector funding, and a discriminatory tax regime that favors government programs.

  • The leasing industry is still very small and requires further reforms to grow.

70. Further efforts are therefore needed to develop the sectors and to improve efficiency. The authorities concur with the mission’s assessment that there is a need to review the current architecture for oversight of the micro finance sector. The mission further recommended developing a policy and guidelines for: (i) the underwriting of microcredit risk; (ii) increasing minimum capital of MFIs; and (iii) reviewing the incentive structure created by the government’s involvement in the various sectors. Other recommendations are detailed in Appendix I.

V. Financial System Infrastructure

A. Payments Systems and Securities Settlement

71. Ghana has implemented various reforms to modernize the national payment and securities settlement system. The reforms were designed to: (i) improve efficiency and reduce risks in the payment system; (ii) deepen financial intermediation; (iii) broaden the range of payment instruments; and (iv) to develop infrastructure that supports interoperability. Significant progress has been made in introducing an electronic funds transfer systems, reducing the check clearing time; improving efficiency in the handling of securities and equities; and strengthening the legal framework most notably with regard to oversight of the payment system (see Appendix V for details).

72. However, despite this progress, important challenges remain for which further reforms are needed. The main challenges relate to: (i) gaps in the regulation and oversight of the payment system; (ii) settlement risk in the retail payment stream; (iii) inadequate business continuity arrangements for the CSD; (iv) absence of a clear strategy for embracing electronic means of payment and reducing the use of cash; (v) the lack of interoperability of Automated Teller Machines and Point of Sale networks; and (vi) the absence of a systematic mechanism for engaging with stakeholders on payment system reform.

B. Insolvency and Creditor Rights

73. Enforcing creditor rights in Ghana remains a challenge despite the steps to reform the legislative and institutional framework for insolvency and creditor rights. The authorities implemented a number of measures, that have potential to reduce credit risk, including: (i) enacting legislation to fast track the process for foreclosing on collateral; (ii) establishing a collateral registry to register charges and collateral credited by the borrowers; (iii) enacting a credit reporting act and issuing licenses for companies to start operating credit registries; and (iv) establishing commercial courts to ensure efficient resolution of commercial disputes.

74. Notwithstanding these steps, important challenges remain which call for additional reforms. Procedures for taking and enforcing security are protracted, legally complex, costly, and unpredictable. There also exists a high degree of information asymmetry that leads to imprudent lending decisions due to the limitations in data captured by the credit registry. In addition, the network of registries in Ghana is complex and prone to creating disruptions in taking and enforcing security. Further reforms are, therefore, needed to the judicial and legislative framework and to make the institutions operational and efficient.

C. Auditing and Accounting

75. Corporate financial reporting practices in Ghana are weak with important ramifications for the soundness of the banking sector and other financial institutions. Efforts are, therefore, needed to strengthen the legal framework for accounting, to ensure compliance and quality control and to enhance the technical knowledge of the regulators, accountants, and auditors of banks in the IFRS. In particular, there is a need to enact a modern Accountants Act to provide legal backing for an arrangement to issue applicable accounting and auditing standards (IFRS and ISA), and to establish an independent oversight body to conduct audit quality assurance review of the auditors of public interest entities. 24 Banks need to establish appropriate accounting and information systems to comply with IFRS requirements. All relevant regulators need to strengthen technical capacity concerning the IFRS.

Appendix I. Detailed Recommendations

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Appendix II. Implementation Status of 2003 FSAP Recommendations

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Appendix III. Risk Assessment Matrix25

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Appendix IV. Stress Testing Methodology and Scenarios

76. This appendix describes the coverage and methodology of the stress tests and discusses the results. The stress tests were undertaken by the FSAP team for all the 26 commercial banks, individually and by groups, during the August mission using end-March 2010 data. These were later updated using data for end December 2010.

77. The risks and magnitude of shocks that were assessed are detailed in the Appendix Table 4 below. In both instances, the simulations sought to evaluate the impact of single and multiple shocks, but data limitations rendered it difficult to quantify some of the key macro risks and to develop macro consistent scenarios. Thus, the magnitudes reflect either historical experience or other intuitively plausible shocks. Feedback loops and other interactions that have potential to magnify the impact of the shocks are not adequately reflected in the analysis.

Appendix Table 4.

Ghana: Single Factor Shocks and Macro Scenarios

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Source: IMF estimates.1/ The scenarios do not take into consideration banks’ future profits.2/ Exchange rate induced credit risk is assessed using panel regression analysis on the 26 banks NPLs and a set of bank specific variables and macro controls.

78. The calibration of shocks took into account vulnerabilities in the banks’ balance sheet and the environment in which they operate. These include the fact that: (i) prospects of collecting on NPLs are weak due to difficulties in enforcing creditor rights; (ii) some impaired loans that are not yet included in NPLs because they are related to government expenditures; (iii) banks exhibit large concentrations in their loan portfolios; (iv) there is a large portfolio of foreign currency deposits and loans; (v) and there is a lot of uncertainty about the direction of interest rates.

79. The updated stress test results indicate that the fundamental vulnerabilities remain the same, though the level of risk in the banking system is significantly lower than assessed at the time of the August mission. The main stability risks facing Ghana’s banking system are credit and concentration risks and these risks are highly interrelated. Liquidity risk is concentrated in the smaller banks. Other risks (contagion risk, market risk induced credit risk etc) are reported to be significant but would require more information to quantify. Macroeconomic shocks, such as fiscal shock or commodity prices shock to cocoa prices pose a significant risk because of simultaneous impact on interest rates, exchange rate and asset quality. In terms of groups, the vulnerabilities are more concentrated in domestic banks. Direct market risk is not significant as foreign exchange risk is minimized by the generally low open position maintained by banks and interest rate risk is mitigated by the practice of lending at variable rates.

Appendix V. Financial Sector Reforms Since 2003

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Appendix VI. Basel Core Principles Assessment—Summary


80. This part contains a summary assessment of Ghana’s adherence to the Basel Core Principles carried out in the context of the FSAP Update mission.27 It updates the earlier assessment of Ghana’s compliance with the BCPs that was done as part of the 2003 FSAP update. The assessment reflects the banking supervision practices of the BOG as of end-August 2010.

Information and Methodology Used for Assessment

81. The assessment was performed in accordance with the 2006 Core principles methodology. It is based on several sources: (i) a review of the legal and regulatory framework; (ii) review of onsite supervision reports, offsite analysis reports and licensing documentation; (iii) interviews with supervision staff of the BOG; (iv) meetings with senior officials of four commercial banks operating in Ghana; (v) interviews with two major international accounting firms that audit banks in Ghana; (vi) chief executive officers of the newly established collateral registry and the credit reference bureau; and (vii) the Ghana Association of Bankers. A self-assessment completed by the BOG was also provided.

Institutional and Macro-Prudential Setting—Market Structure

82. The banking industry in Ghana comprises the central bank, ARB Apex Bank,28 26 commercial banks, 136 RCBs and two representative offices. Twenty five of the commercial banks hold class one banking license while one bank holds a general banking license. Thirteen commercial banks accounting for 52 percent of the banking system assets are subsidiaries of foreign-controlled banks; and five banks (accounting for 30 percent of the banking system assets) have majority state shareholding. The state-owned banks have varying degrees of performance problems, including high NPLs, solvency, and liquidity.

General Preconditions for Effective Banking Supervision

83. The pre-conditions for effective supervision of banks are improving but more is needed to ensure an enabling macroeconomic environment and an effective financial infrastructure. In particular, high lending rates, operational challenges with the newly established institutions to enforce creditor rights, weaknesses in compliance with accounting and auditing standards; gaps in the safety nets and non-compliance with most of FATF principles against a background of an open capital account regime, all present challenges for supervision. In addition, the current gaps in the public safety nets could render the resolution process costly.

84. The macroeconomic environment is currently unfavorable for the banking industry. Though GDP growth has been generally high, the fiscal position has deteriorated substantially and the government continues to incur domestic arrears that have underpinned the high NPLs across the industry. More recently, although the BOG has been reducing the policy rate and inflation has fallen to single digits, lending rates have been slow to respond largely due to: (i) high inflation expectations in the face of weak fiscal fundamentals; (ii) rigidities in the banks’ balance sheets; (iii) high operating cost; (iv) high reserve requirements; and (v) high NPLs and associated provisions.

85. The legislative and institutional framework for insolvency and creditor rights has been undergoing reforms, but important weaknesses persist. The legal framework for insolvency is outdated and out of step with the realities of modern commerce. Further, despite the establishment of commercial courts, the procedures for taking and enforcing security are time-consuming, legally complex, costly, and unpredictable. The establishment of the new Collateral Registry offers the advantage of non-judicial enforcement of the charges, but registration is additional to registration in the other relevant registries. There appears to be little coordination between the various registries, confusion regarding the order in which registration must be carried out, and which registrations establish unimpeachable title to security.

86. The accomplishments in strengthening accounting and auditing standards need to be complimented by actual implementation. The law requires banks to present accounts in accordance with the IFRS. However, the financial statement of some banks and other financial institutions were found to be non-compliant with some of the requirements of the IFRS. In some cases, inappropriate accounting techniques have been used to camouflage losses and demonstrate healthy balance sheets. The weaknesses are attributable to the absence of an appropriate enforcement mechanism to ensure compliance with the IFRS and the absence of an independent oversight of the profession.

87. The payment system has been significantly improved but there is scope for improvement. Further work is needed to improve the oversight of the payment system; address gaps in processes that introduce settlement risk; improve business continuity arrangements and the ensure interoperability of systems.

88. Recent reforms have equipped the country with a regime for AML/CFT, but a number of legislative and regulatory improvements are still needed. Ghana is not yet compliant with most core and key FATF recommendations. The Financial Intelligence Centre (FIC) had since been established but the very high volume of cross-border cash movement calls for greater vigilance in supervision of AML/CFT.

89. Market discipline is ineffective due to structural and public infrastructure constraints and cannot be expected to influence the amount of capital a bank holds. There are currently no rating agencies, financial journalism is not well developed, and there is a paucity of market analysts. Only six of the 26 banks are listed in the GSE and almost all banks, except one that has issued a bond, rely almost exclusively on deposits and direct borrowing for funding.

90. There are also some gaps in the mechanisms for providing an appropriate level of systemic protection (or public safety net). Ghana has no explicit deposit protection scheme and a documented contingency plan for dealing with system-wide bank failures. The BOG could also benefit from additional resolution powers that allow the BOG to intervene without recourse to shareholders or the courts, while preserving shareholders rights.

Principle-by-Principle Assessment

91. The BOG has been making efforts to align its regulatory and supervisory framework with international standards, but important gaps remain. Despite major accomplishments on the legislative front and efforts to strengthen the supervisory process, 14 of the 25 Basel Core Principles supervisory practices were found to be either non-compliant or materially non-compliant. Some of the shortcomings have important implications for banking system soundness, most notably consolidated supervision, lack of supervisory guidelines on risk management, and supervisory forbearance. Other notable areas where compliance is significantly deficient relate to the licensing process and ineffective enforcement of the AML/CFT guidelines. The assessments are summarized below.

Objectives, independence, powers, transparency, and cooperation (CP 1)

92. The BOG’s responsibilities and supervisory objectives are well entrenched in law and clear. Since the last FSAP in 2003, several legislative improvements have been made in establishing the BOG’s primary objectives, operational autonomy, transparency and accountability. In addition, the law significantly enhanced the BOG’s powers to take proactive remedial actions and resolve problem banks.

93. However, the BOG has not always been as forceful and proactive in utilizing its legal powers, particularly in the cases of SBs. There are instances where banks that did not meet the minimum solvency and other prudential requirements were permitted to continue undertaking normal banking business in contravention of the banking laws. The BOG used a temporary liquidity facility to keep afloat a bank that would otherwise have been insolvent. Also, ownership stake in some banks by the BOG, complicates supervisory governance and could taint its reputation and credibility where enforcement actions are delayed, or in the event banks in which either the government or BOG has beneficial ownership become a source of systemic banking problems.

94. The BOG had started informal discussions with both the NIC and the SEC to enter into a joint MOU that would facilitate the sharing and exchange of information among all domestic regulatory bodies. MOUs have also been executed between the BOG and some but not all foreign supervisors, and there is significant room for improvement in terms of practical implementation.

Licensing and structure (CPs 2–5)

95. The BOG is the sole licensing authority for banks and other NBFIs falling under its regulatory and supervisory purview. However, the opportunity for the applicants to appeal a licensing decision or an order by the BOG to the minister, to be advised by a three-man panel on which the BOG has one representative, could jeopardize the operational autonomy. In licensing subsidiaries of foreign banks, the BOG does not conduct a detailed due diligence exercise on the parent bank and/or home supervisory authority.

Prudential regulation and requirements (CPs 6–18)

96. The prudential requirements are set out in the banking law and BOG has power to issue supervisory directives and other administrative guidelines. In 2008, the BOG issued a directive to increase the minimum capital requirement for banks to be

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60 million by December 31, 2009 for foreign-owned banks and December 2012 for domestic banks. Banks are permitted to trade for their own account in foreign currency subject to observing open position limit of 15 percent for a single currency exposure and, in aggregate, 30 percent of the bank’s regulatory capital.

97. However, the BOG is short of formal minimum risk management guidelines covering all risk categories and aspects.29 It relies on “good practice” guidelines that lack the detail and rigor to serve as the minimum regulatory benchmark for a supervisory authority and do not address jurisdiction specific risks. Furthermore, international “good practice” does not distinguish between essential prerequisites and “nice to have” practices. The lack of a clear minimum supervisory standard can lead to inconsistencies in implementation of regulations.

98. Many Ghanaian banks do not have comprehensive and robust risk management infrastructure, including internal risk rating systems, risk quantification and structured risk reporting, as well as rigorous qualifying standards for internal assessments of risk as inputs to the calculation of the amount of economic capital. Except for a few subsidiaries of major internationally-active banks, the risk management culture was not embedded in the investment/trading, banking and other operational processes of banks and, in particular, a majority of banks neither had a forward-looking approach to capital management nor any internal process for assessing overall capital adequacy in relation to their risk profile.

Methods of ongoing banking supervision (CPs 19–21)

99. The BOG has adopted a risk-based approach and techniques for bank supervision, but more work is needed to achieve the objectives. Key challenges include the lack of human capacity, including expert risk analysts and systems, as well as more comprehensive risk-based senior management reporting and the setting of risk based capital requirements and on site schedules.

100. The BOG needs to establish a clear project implementation plan for an effective and comprehensive risk-based supervisory framework. The plan should address greater investment in systems and data processing capability, the hiring of specialized risk experts, particularly in areas such as IT and market risk as well as the development of supervisory guidelines on minimum standards for credit, market, liquidity, and operational risk management and corporate governance framework for banks.

Accounting and disclosure (CP 22)

101. Accounting and auditing requirements are generally in line with the IFRS and International Standards on Accounting (ISA) but in some instances, practices have fallen short. Banks are required to publish audited financial statements annually. External auditors are required to issue a “long form” report to the BOG after conclusion of the statutory audit of the bank. Furthermore, the BOG has the power to object to the appointment of an external auditor.

102. However, financial statements of some banks were found to be non compliant with the requirements of the IFRS. Also, communication between the external auditors and BOG could be enhanced further by more frequent bilateral meetings, at least once a year, to share information on emerging risks and other pertinent issues relating to safety and soundness of a bank’s operations. Auditors appeared to be under pressure to further reduce fees and hence the time spent on their banking mandates to remain competitive and there are also capacity concerns with external auditors.

103. The BOG should ensure that bank audits remain of a high standard. In the short term, it can do so by meeting and challenging external auditors more frequently as indicated above, but also by requiring the reporting of actual and budgeted time spent on the mandate and meeting banks that put too much emphasis on audit fees instead of audit quality. In the longer term, legal powers to review working papers should also be sought.

Corrective and remedial powers of supervisors (CP 23)

104. Section 60 (b) of the Banking (Amendment) Act, in particular, has provided the BOG with a range of remedial powers, including appointment of an advisor and conservator. These powers include the ability to prohibit a bank from taking deposits, lending and/or paying dividends when not meeting prudential norms or it is conducting its business in an unsafe and unsound manner. The BOG is also empowered to remove management or board of directors of a bank. Also, section 26 of the Banking Act gives the BOG unfettered powers to arrange the merger of a troubled bank with a healthy one or such other action as the BOG deems appropriate in the event of a persistent problem of capital deficiency.

105. However, the BOG could benefit from additional remedial powers and there is need to improve enforcement of the powers. In particular, the remedial powers in section 60 (b) could be expanded as detailed in Appendix I. Further, the BOG has been slow and shown lack of firmness in taking prompt and effective remedial actions, particularly with respect to banks in which either government or the BOG has a shareholding. This could compromise the integrity and reputation of the BOG. There is also a need for more explicit arrangements for handling a system-wide banking crisis, including a formal financial sector contingency plan to, inter alia, address a systemic banking crisis. The blanket provision given by the “catch all” phrase exposes the BOG to potential legal challenges from shareholders of the bank and can lead to inconsistencies in interpretation and implementation by supervisors. Thus it is important to enumerate the powers that the BOG has and the conditions under which the powers can be used. The BOG also needs additional resolution options such as the ability to intervene insolvent banks without consent of court and current shareholders, including purchase and assumption subject to adequate provisions for the protection of shareholders. The provision that the BOG intervenes only when all capital is exhausted is too low and a higher threshold of say 4 percent could be considered to trigger corrective action.

Consolidated and cross-border banking supervision (CPs 24–25)

106. The BOG does not have powers to undertake consolidated supervision despite the predominance of foreign-owned banks and the growing importance of conglomerates. The BOG cooperates closely on an informal basis with the Central Bank of Nigeria, but there is a need to formalize the arrangement and to extend the cooperation to supervisors of the other banks. Also, a more interactive engagement with other domestic supervisory authorities, notably The NIC, SEC and NPRA, with a view of harmonizing common prudential norms, such as the fit and proper criteria for the management and board members, should be considered.

Appendix Table 5.

Action Plan to Improve Compliance of the Basel Core Principles

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Authorities’ response

The authorities had an opportunity to review and discuss the BCP assessment report with the FSAP assessors. They broadly agreed with the assessment and certain clarifications of facts were provided which were accepted. The Ghanaian authorities have recognized the continued need to strengthen banking supervision and move towards a risk-based approach. They have also begun to address some of the shortcomings that have been identified and have requested TA to assist them with implementation.


The insurance sector exhibits similar trends. Of the 42 insurance companies operating in Ghana, 16 have significant foreign participation, eight are wholly foreign owned, and a number of new entrants come from Nigeria.


The central bank has majority and significant shareholding in three commercial banks, while the SSNIT has majority shareholding in two banks and significant shareholding in 9 banks.


The mission identified at least 12 banks that had common shareholders.


By 2008 the annual growth in credit accelerated to 60 percent in nominal terms and 35 percent in real terms.


Credit risk in the form of nonpayment of premiums also threatens the insurance industry.


The aggregate cost-to-income ratio is estimated at 72 percent for end-December 2010 and ranges between 50 percent and 128 percent. Banks face high funding costs because of: (i) the practice of benchmarking the corporate deposits rates to t-bill rates; (ii) a deposit structure that includes a large share of term deposits that lock in rates for periods of time, (iii) high overheads; and (iv) high NPLs and associated provisions that require banks to maintain high interest rate margins.


Foreign investors had increased their participation in government debt markets. In 2008, following the global crisis, a number of these investors exited their positions. This contributed to exchange rate depreciation by more than 50 percent between May 23, 2008 and the peak of July 30, 2009 and to increased funding costs in the short-term money markets.


The two dynamic sectors (cocoa and gold) that have driven growth source their funds in international markets.


In 2007, the minimum capital requirement was increased from

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7 million to
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60 million. Foreign banks had to meet the new requirements by end-December 2009. Local banks were required to meet the new requirement by end-2012 but in the interim to increase their minimum capital to
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25 million by end-December 2010.


The mission estimated that 46 percent of the NPLs at end March 2010 were directly or indirectly caused by the government’s accumulation of domestic arrears and were heavily concentrated in SBs. Government related NPLs consisted of: (i) NPLs by energy related SOEs that had not received subsidies for the under-recoveries on petroleum products at the directive of the government; and (ii) impaired assets due to the government’s nonpayment of vendors and contractors.


Staff computations indicate that the higher locked-in funding costs and a consistently large (12–13 percent) interest margin are major contributors of the high lending rates. The margin is mainly driven by high overhead costs (7.6 percentage points), which are mainly comprised of staff-related expenses (50–55 percent of overheads) and growing administrative costs (25–30 percent of overheads). An important reason for high overhead costs is a lack of scale economies due to the small system and average bank size. Profit margins on the other hand were small (0.0–0.5 percentage points).


Detailed stress tests were performed by the FSAP team in August. The methodology and assumptions together with the results of that exercise are detailed in a technical note.


The BCP ROSC is attached as Appendix VI.


The monetary instruments include a cash reserve requirement of 9 percent for foreign currency and domestic currency liability maintained in U.S. dollars and cedis, respectively. Banks are allowed to maintain a single account for the reserve requirement and for clearing and settlement.


In the run up to the financial crisis, foreign investors held more than 15 percent of government securities and about half of the three to five-year paper.


The powers are stipulated in the Banking Act (Articles 13, 14, 15, 28, 60A, 60B, 62, 67, and 68). The Insolvency Act on the other hand, stipulates how a liquidator shall carry out the liquidations but in its current formulation it offers little scope for any rehabilitative action to formally take place.


The recent introduction of conservatorship is useful, but not sufficient for bank resolution since conservators cannot take decisions on behalf of shareholders.


The authorities recently signed a contract with a consulting firm to undertake a feasibility analysis for the establishment of the deposit insurance.


As at December 2010, the SSNIT held assets valued at

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2,738.8 million (US$1.88 billion) representing 6 percent of GDP. The SSNIT held 3.3 percent of the total market and 12 percent of the banking sector capitalization at the GSE in June 2010. When the free float market capitalization is taken into account, the SSNIT effectively held over 40 percent of the float at the GSE.


The assessment was undertaken by the AML/CFT regional group for West Africa. For more details see the 2009 GIABA Mutual Evaluation Report (MER) Available at http://www.


Corporate bonds have not picked up in part due to a cumbersome primary issuance framework, lack of a liquid benchmark treasury yield curve, concentrated investor base, and a high inflation and high interest rate environment.


The minimum capital requirement for both life and non-life are the cedi equivalent of US$1 million and for reinsurers the equivalent of US$2.5 million. International best practices suggest that US$5 million is appropriate for non-life companies, US$10 million for life companies and reinsurers with capital at least three times that of insurers.


In this context, the experience of the South African Independent Regulatory Board for Auditors can be helpful. Organizations with similar mandates in some other countries are: The Public Company Accounting Oversight Board in the United States, the Financial Reporting Council in the United Kingdom, and the Financial Reporting council in Mauritius.


The impact of these shocks are quantified in Table 3, discussed in paragraph 29–35, and further detailed in Appendix IV.


The probability of defaulting on the government bonds is extremely low, particularly given the rising prices of oil exports.


The summary is based on the detailed assessment undertaken as part of the FSAP by Katia d’Hulster (World Bank) and Moses Pelaelo (consultant, International Monetary Fund).


ARB Apex Bank is a “mini-central bank” with a banking license (though with substantially lower minimum capital requirement) whose shareholders are the RCBs.


There are no guidelines for credit risk, market risk, operational risk nor are there minimum guidelines covering risk management and governance, internal control, compliance, and internal audit.

Ghana: Financial System Stability Assessment Update
Author: International Monetary Fund