Abstract
This 2013 Article IV Consultation highlights that economic growth in Ghana continued at a robust pace of 8 percent in 2012 amid rising fiscal and external imbalances. Fiscal pressures came to the fore in a mounting public sector wage bill and costly energy subsidies that pushed the deficit close to 12 percent of GDP. The growth momentum continues into 2013, with increased oil production projected to keep overall GDP growth close to 8 percent. Non-oil growth is likely to decelerate, however, as a result of energy disruptions and high real interest rates.
Introduction
1. Ghana was selected to be one of the pilot cases for enhancing surveillance of financial systems called for by Executive Board in May 2012 (FO/DIS/12/66).1 The Board discussion found that a shallow and undiversified financial sector creates macro-financial vulnerabilities that impact the macroeconomy, and its ability to sustain growth and reduce poverty. While important to understand how to generate financial deepening that will provide greater access to credit and financial services, the process of deepening itself carries with it its own risks if there is inadequate supervision and regulation. The paper also shows that undeveloped financial systems constrain monetary policy implementation and the efficacy of its transmission mechanism as these systems are often characterized by excess liquidity and thin government debt markets rendering interest rates less correlated with policy rates.
2. This study comes on the heels of the Ghana Financial Sector Assessment Program (FSAP) update conducted in February 2011. Section II presents the macroeconomic context shaped by expansionary fiscal policy in the run-up to the elections in 2012. Section III presents an overview of the financial system, focusing on the dominant banking sector. Section IV, identifies emerging vulnerabilities, including supervisory challenges associated with risks identified in the FSAP update and new risks from the evolving financial landscape, with a growing presence of regional banks. Section V reviews financial access provided by nonbank financial institutions, and associated risks. Given the active role the government has played in the financial system, section VI examines the extent of this role, and suggests how it could be modified to create a more robust sector that can provide greater access and competition for banking services. Finally, the Board paper highlights the interaction of the financial sector with the effectiveness of monetary policy implementation. Section VII reviews the monetary policy framework in Ghana, and recommends how monetary policy implementation could be improved. This section also makes recommendations of how to develop the still small interbank and foreign exchange markets.
3. The main findings are as follows:
While the banking system has grown rapidly and is competitive by standard metrics (barriers to entry and concentration of assets), private credit has remained relatively low as a share of GDP and access to affordable credit is a major constraint on growth.2
High real interest rates—a result of structural factors, such as high operating cost, but also excessive government borrowing—are constraining private sector access and create risks of a renewed increase in nonperforming loans (NPLs).
An upgrading of financial sector legislation and supervisory practices is ongoing and is needed to deal with the growing complexities of an evolving financial landscape with increased foreign participation and a growing role of microfinance institutions.
Rural and Community Banks have become a main channel for financial inclusion, though only about 30 percent of adults have an account at a formal institution. A sizeable part of the population relies instead on the services of about 600 microfinance companies, as well as 3,000-5,000 individual susu collectors that serve over half a million customers.
The ownership role of the state, especially of the BoG, in the financial sector raises concerns about a level playing field and reputational risks to the BoG’s credibility as an independent regulator and supervisor. Risks also arise from the slow decision-making and resolution process for the two remaining weak banks.
The BoG has the tools to conduct effective inflation targeting, but there is room to improve its forecasting and liquidity management framework to restore the signaling role of its policy rate.
A return to fiscal discipline and effective policy coordination are needed for successful further disinflation and increased financial deepening.
Macroeconomic Environment in 2012
4. While real GDP growth in Ghana has been steady and robust in recent years, the fiscal surge in 2012 in the run-up to elections creates risks for economic and financial stability. GDP growth in 2012 was 8 percent, with a rising public sector wage bill and costly energy subsides pushing both the fiscal and current account deficits to about 12 percent of GDP. The government financed almost 80 percent of its deficit domestically, and additionally accumulated new arrears. The repeated occurrence of government arrears introduces uncertainty into financial transactions, as banks are concerned that NPLs may increase. They particularly reduce access of smaller firms that depend on government contracts, because banks tend to scrutinize them more, anticipating the risk of nonpayment.
5. In response to rapid exchange rate depreciation, monetary policy was tightened in the second half of 2012. The currency has since stabilized, but at the cost of double-digit real interest rates. The year ended with inflation remaining in single digits at 8.8 percent, helped by low food and repressed domestic fuel prices.
6. Following the fiscal deficit surge and the tight monetary stance, the price of borrowing shot up. Starting at below 10 percent at end-2011, interest rates on 91-day Treasury bills went from close to 14 percent in the first half of 2012 to 21½ percent in the second half, and have inched up to about 23 percent in April. While the policy rate also increased, though only to 15 percent, the interbank rate has hovered at around 19 percent.
7. The large volume of domestically financed government borrowing at high interest rates threatens to crowd out private sector credit. Discussions with banks suggested that they are not eager to extend loans to much riskier small and medium-sized enterprises, when they can so profitably lend to the government at low risk of default.
Overview of the Financial System
8. Ghana’s financial sector is bank dominated. Commercial banks account for more than 75 percent of total financial sector assets, followed distantly by Rural and Community Banks (5 percent), while pension funds, the insurance sector and other sectors such as leasing are still at a nascent stage (Table 1).
Structure of the Financial System
Capital market data was not included in this table.
Since 2012 data for “other banking and quasi banking institutions” and “pension funds” is not available, the same growth as 2011 is assumed.
Structure of the Financial System
| 2010 | 2011 | 2012 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Number | Total Assets (GH¢) | Percent of total assets |
Number | Total Assets(GH¢) | Percent of total assets |
Number | Total Assets (GH¢) | Percent of total assets |
|||
| Total Financial System 1/ | 23,334,825,074 | 100 | 29,574,084,492 | 100 | 36,526,615,467 | 100.0 | |||||
| Commercial Banks | 26 | 17,397,657,156 | 74.6 | 27 | 22,059,059,114 | 74.6 | 26 | 27,237,112,536 | 74.6 | ||
| Nonbank Financial Institutions | 2,007,335,933 | 8.6 | 2,952,457,425 | 10.0 | 4,374,090,081 | 5.1 | |||||
| Rural and Community Banks | 133 | 875,820,000 | 3.8 | 132 | 1,156,660,000 | 3.9 | 133 | 1,524,030,000 | 5.1 | ||
| Other Banking and Quasi Banking Institutions | 1,131,515,933 | 4.8 | 1,795,797,425 | 6.1 | 2,850,060,081 2/ | 7.8 | |||||
| Insurance companies | 948,831,985 | 4.1 | 1,142,567,953 | 3.9 | 1,191,267,381 | 3.3 | |||||
| Pension funds | 2,981,000,000 | 12.8 | 3,420,000,000 | 11.6 | 3,923,649,782 2/ | 11.6 | |||||
| Memorandum Items | |||||||||||
| GDP (millions of GH¢) | 46,236 | 59,816 | 73,109 | ||||||||
| Total financial sector assets/GDP | 50.5 | 49.4 | 45.4 | ||||||||
Capital market data was not included in this table.
Since 2012 data for “other banking and quasi banking institutions” and “pension funds” is not available, the same growth as 2011 is assumed.
Structure of the Financial System
| 2010 | 2011 | 2012 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Number | Total Assets (GH¢) | Percent of total assets |
Number | Total Assets(GH¢) | Percent of total assets |
Number | Total Assets (GH¢) | Percent of total assets |
|||
| Total Financial System 1/ | 23,334,825,074 | 100 | 29,574,084,492 | 100 | 36,526,615,467 | 100.0 | |||||
| Commercial Banks | 26 | 17,397,657,156 | 74.6 | 27 | 22,059,059,114 | 74.6 | 26 | 27,237,112,536 | 74.6 | ||
| Nonbank Financial Institutions | 2,007,335,933 | 8.6 | 2,952,457,425 | 10.0 | 4,374,090,081 | 5.1 | |||||
| Rural and Community Banks | 133 | 875,820,000 | 3.8 | 132 | 1,156,660,000 | 3.9 | 133 | 1,524,030,000 | 5.1 | ||
| Other Banking and Quasi Banking Institutions | 1,131,515,933 | 4.8 | 1,795,797,425 | 6.1 | 2,850,060,081 2/ | 7.8 | |||||
| Insurance companies | 948,831,985 | 4.1 | 1,142,567,953 | 3.9 | 1,191,267,381 | 3.3 | |||||
| Pension funds | 2,981,000,000 | 12.8 | 3,420,000,000 | 11.6 | 3,923,649,782 2/ | 11.6 | |||||
| Memorandum Items | |||||||||||
| GDP (millions of GH¢) | 46,236 | 59,816 | 73,109 | ||||||||
| Total financial sector assets/GDP | 50.5 | 49.4 | 45.4 | ||||||||
Capital market data was not included in this table.
Since 2012 data for “other banking and quasi banking institutions” and “pension funds” is not available, the same growth as 2011 is assumed.
9. The banking sector has grown by almost 60 percent since 2010, with total commercial banks assets reaching GH¢27 billion in 2012. Foreign banks account for 55 percent of commercial bank assets, with various banks from Europe, Nigeria and South Africa having established offices in Ghana. (Appendix 1 shows selected financial indicators in Ghana over time, benchmarked against what would be predicted using similar characteristics including GDP per capita.)
The Banking Sector
A. Access to Credit and Banks’ Performance
10. Access to credit remains constrained and below the potential needs of the country. Private credit has been stable in recent years at 15 percent of GDP,3 though deposit mobilization has improved, with deposits increasing from 20 percent of GDP in 2007 to 24 percent in 2011. Credit growth accelerated sharply in 2012 at over 40 percent, a rate last observed in 2008. The ratio of credit to GDP however remains well below values observed in peer countries or predicted by a panel regression model (e.g. 21 percent predicted for 2011)4, in part due to the strong growth experienced in Ghana.
11. The banking system is diversified and fragmented. Domestic private banks have grown particularly fast (22 percent of assets compared with 12 in 2005), while foreign banks have continued to have the largest market share and have gained ground (55 percent in 2012 of assets compared with 49). The role of public banks is gradually decreasing (23 percent of assets in 2012 compared with 40 percent in 2005). In terms of assets, market concentration remains limited relative to comparators. The five largest banks control 45 percent of assets and the largest one has a 12 percent market share (after it took over a small public bank)5. There is no sign of broad market consolidation, with few mergers, no exits and new domestic and foreign banks still applying for licenses (most recently, a domestic bank was granted a license in late 2012).
12. Banks primarily lend to a few large counterparties. Mortgage lending remains underdeveloped and consumer finance is just starting, with impressive growth observed recently in a few banks. Available data points to significant concentration of banks’ business. At the end of September 2012, 55 percent of all loans went to the fifty largest borrowers. Moreover, this high figure underestimates credit concentration as many institutions implement a value chain approach and offer credit to large corporates’ employees and suppliers.6 Detailed information is not available on loans to Small and Medium Enterprises (SMEs) but most banks mentioned they were only now preparing to target this market.
13. Banks’ funding has shifted towards demand deposits, but still exhibits significant concentration. Customer deposits increased from 58 percent of total liabilities in 2009 to 67 percent in 2012 (with demand deposits increasing 10 percentage points to 41 percent and term deposits declining 4 points to 13 percent), while deposits from other financial institutions declined. These gains were achieved in spite of a slow expansion of the branch network (866 in 2012 compared with 784 in 2010).7 The funding base remains concentrated with the twenty largest depositors representing 30 percent of all deposits at the end of September 2012.
14. The cost of credit is high (both in nominal and real terms) and reductions since the peak observed in 2008-2010 are being reversed. Offered rates on corporate loans have hovered around 25 percent since 2005 and exceeded 30 percent in 2008-2010. They declined to a low of 24.5 percent in August 2012, when they started to increase again. Rates reached 25.7 percent by the end of 2012. Similarly, ex post lending rates declined from 25 percent in 2010 to 19 percent in 2011 before increasing again to 20 percent in 2012.
15. Bank efficiency has improved, but remains poor. Overhead costs to total assets stood at 7.3 percent in 2011 compared to 9.5 percent in 2007. The level observed in 2011 remains significantly above peer countries and the predicted value.8 The cost to income ratio is relatively high (61 percent in 2011), but closer to values observed in peer countries.
16. The banking industry is very profitable, with exceptionally high returns on average asset and equity in 2012 (Figure 1). The largest banks exhibit the highest profitability ratios probably reaping the benefits of economies of scale and being price makers in some markets. The largest banks also have different business profiles and strategies, reducing the impact of competition.
Evolution of Returns on Average Asset (ROAA) and Equity (ROEE)
Citation: IMF Staff Country Reports 2013, 187; 10.5089/9781484377673.002.A003
17. In 2012, the Bank of Ghana introduced new requirements on credit pricing with the objective of addressing the high cost of credit in Ghana. It defined how banks should calculate their own base rate (cost of funding, operational cost, cost of risk and profit margin) and required that banks do not offer credit below such base rate. So far, the 91-day Treasury bill rate continues to be for many banks a key determinant in the setting of customer rates.
B. Banking Soundness
18. While the banking sector has been emerging from a period of strain, areas of weakness remain particularly amongst the public banks. The sector has experienced periods of heavy loan losses resulting from poor governance and weak credit standards and banks have been ill-equipped to address the pronounced economic cycles in Ghana. Performance has been weakest among the domestic (mostly public) banks, but foreign-owned banks have not been immune. The BoG has responded by raising bank capital requirement levels—a GH¢60mn minimum paid-up capital requirement took effect for all banks at the end of 2012. These efforts have borne some fruit in 2012. However, two medium-sized domestic banks remain weak.
19. Key indicators of the sector’s financial soundness have stabilized over the last year (see Figure 2), in part due to banks’ strong profitability. The key Capital Adequacy Ratio (CAR) reached 18.6 percent at end-2012 (from 17.4 percent at end-2011) as banks not yet meeting the GH¢60mn requirement raised new capital (all banks were in compliance by the deadline). Nonperforming loans (NPLs) have been gradually falling as a share of the total loans, although only from 14.2 percent to 13.4 percent in the year to end-2012, as have net NPLs (i.e. after deducting provisions) in relation to capital. By contrast, liquid asset ratios have been worsening slightly, despite banks’ preference for high-yielding government securities, which remain at elevated level (Figure 3). While the system as a whole has strengthened, the position of individual banks still varies significantly. One bank is in breach of its CAR.
Evolution of NPLs, Provisions, CARs and Leverage Ratios, 2005–2012
Citation: IMF Staff Country Reports 2013, 187; 10.5089/9781484377673.002.A003
Evolution of Liquidity Ratios, 2005-2012
Citation: IMF Staff Country Reports 2013, 187; 10.5089/9781484377673.002.A003
Source:Bank of Ghana20. The quality of bank credit needs careful assessment in the context of Ghana’s banking sector. Recent reductions in NPLs reflect in part the sector’s rapid credit growth, although underwriting standards for new loans remain untested. The high share in bank lending of overdraft facilities, lending by public banks that is influenced in some cases by government priorities, and loans where servicing is dependent on the performance of government are likely to mask some forbearance. Banking sector NPLs have been reduced by restructurings of past loans (the two weaker banks have established asset management companies that are not subject to bank provisioning requirements). All banks are slow to write-off NPLs, which requires supervisory approval. The use of stress and scenario testing to identify and respond to vulnerabilities remains underdeveloped.
21. Improved audit and supervisory work appears to be contributing positively to bank soundness, as are improvements in banks’ governance and risk management. Since 2010, the BoG has required banks to rotate their auditors and has increased its scrutiny of financial statements and its challenge to bank management and auditors, and banks seem to be responding to this more intensive supervision. In addition, many of the weaker banks have restructured their boards, recruited experienced new senior managers, established risk management units and started to develop risk practices, particularly for credit.
22. Banks remain vulnerable to volatility in the economy and financial policies. Banks noted in discussion the potential for rapid changes in financial conditions, as occurred most recently in mid-2012. Credit quality is also likely to be adversely affected by the current high interest rate environment (see Figure 4) and by the government’s management of its cash flows, including arrears financing.
Selected Interest Rates, Credit to GDP and NPL Rate
Citation: IMF Staff Country Reports 2013, 187; 10.5089/9781484377673.002.A003
Source: Bank of Ghana23. There are several areas of concentrated risk in the banking sector. Banks’ focus on larger borrowers risks concentrations of loan portfolios (the top 50 borrowers account for over 50 percent of loans on average). Some banks have concentrated exposures to energy sector borrowers, where single obligor limits have in some cases been waived by the BoG in the interests of enabling energy supplies to be maintained. Banks’ exposures to other banks are not subject to prudential limits and can be large. Market and interest rate risks are not subject to comprehensive regulatory requirements or to strong asset and liability management frameworks yet.
24. The outlook for the two weak banks is uncertain, creating stability risks. Both banks require recapitalization, funds for which have not been forthcoming from existing shareholders (government and SSNIT). Other domestic banks lack the financial strength to support a merger. Neither bank accounts for more than 3.5 percent of total banking sector assets. However, uncertainty over the outlook creates risks to confidence. Orderly resolution and closure are currently not being considered.
Policy recommendations
For further financial deepening and for the sector to provide greater access to credit, it is important for the banking sector to be sound and well-functioning. Below are some recommendations to build such a sector.
Address risks posed by the two remaining weak banks as a priority. Where decisions are pending on potential private sector solutions, other options (including orderly resolution) should be considered and contingency plans developed; weak banks should not be permitted to expand their business beyond current levels (see also section V.)
Develop further the analysis of NPLs. This could include cross-bank reviews of practices (for example in relation to claims on government and overdraft lending).
Strengthen capacity to identify and respond to emerging risks, including further development of scenarios and stress testing and closer integration of stability analysis with actions to be taken by bank supervisors to address risks. The BoG should consider requiring banks to hold additional capital buffers against a future downturn.
Review threats to stability from risk concentrations in the banking sector, including risks related to claims by banks on other banks (which are not subject to single obligor limits) and exposures of foreign-owned banks to the groups of which they are a part.
C. Regulatory and Supervisory Developments
25. The 2011 FSAP made extensive recommendations on strengthening the regulatory and supervisory framework, but implementation has been patchy.9 The assessment of compliance with the Basel Core Principles (BCPs) pointed to many areas where the BoG’s powers were inadequate, for example on consolidated supervision and bank resolution; where regulatory standards were weak; where the BoG had not set expectations of banks in relation to issues such as corporate governance; and where effective supervision was being compromised by forbearance. The FSAP also noted the need to develop crisis management arrangements and to strengthen the safety net (by introducing deposit insurance). The BoG has been improving supervision processes but has made limited progress as yet on the FSAP recommendations on regulation and financial stability.
26. Significant improvements in the BoG’s supervisory work provide a basis for the introduction of risk-based supervision. The BoG has strengthened its offsite supervision with an enhanced risk assessment process that addresses key areas of supervisory focus (solvency, liquidity, earnings, management and sensitivity to foreign exchange risk) and assigns to banks an overall rating. The BoG is using its new risk assessments to inform its onsite work program. The first trilateral meetings with bank managements and auditors covered all banks for two years of financial statements, and these meetings are being used to support the development of a more intensive style of supervision.
27. However, this improvement in supervision is not being matched by developments in regulation. Too much of the burden of effective prudential regulation is being placed on supervision which requires significant resources, especially given the number of banks in the sector. The BoG has identified necessary legislative changes including:
powers to perform consolidated supervision;
further powers to carry out orderly bank resolution;
establishment of single obligor limits in relation to banks’ exposures to other banks; and
introduction of administrative sanctions for defined breaches of requirements without the need for summary conviction by a court.
28. The BoG’s ability to enforce prudential regulation is currently jeopardized by gaps and inconsistencies in the law and regulations. Preparation by the BoG of draft legislation and its submission to the MoF, the first step in the legislative process, has not been completed. The Bank engaged consultants to undertake the initial drafting, but the work was not undertaken as contracted, causing significant delay and leading to the BoG requesting technical assistance from the IMF. The BoG has made progress with the preparation of implementing regulations and guidelines covering issues such as expectations of external auditors, corporate governance and outsourcing, but these have not been issued.10
29. In addition, there are areas where regulations made under existing powers need to be strengthened:
Aspects of the CAR calculation framework are weak (including the 50 percent risk weighting of export finance highlighted in the FSAP); and the BoG now needs to move away from emphasizing minimum nominal capital, which is being eroded by inflation,11 to perfecting its risk-based framework.
The BoG is relying for its bank liquidity regulation on the primary reserve requirements that form an important part of monetary policy operations; but these are not fit for prudential liquidity purposes should be supplemented by new liquidity standards drawing as appropriate on the Basel III framework.12
30. Supervisory effectiveness continues to be impaired by forbearance and distraction from prudential objectives. While the BoG plans to restrict new waivers from the single obligor limits to exposures to state-owned enterprises in relation to oil and gas business, banks continue to have expectations that waivers will be granted at short notice where energy supplies are at stake. In other areas, effective supervision may be compromised by the elevation over prudential considerations of wider objectives such as supporting growth in bank lending (the basis for the 50 percent risk weighting for export finance); promotion of bank mergers (the basis for a paid-up capital target); and policy on state-owned banks.
31. Ghana continues to lack a comprehensive crisis management plan and full bank resolution powers. While there has been no bank failure in Ghana since 1999, the authorities have had to manage stress at banks - relying on extensive informal intervention powers, liquidity support by the BoG, and various forms of forbearance. The options provided for resolution in the legal framework remain less than comprehensive. There remains no deposit insurance scheme and no formal crisis coordinating arrangements. Mechanisms for crisis management have proven effective in the short term in preventing instability but are informal and rely on government readiness to provide support that undermines the credibility of alternative approaches, especially the use of resolution powers. The objectives should be to establish practical arrangements for managing a crisis, including the definition of roles and responsibilities; and to build credibility that resolution tools will be used in practice.
Cross border supervision
32. Ghana has extensive responsibilities as a host supervisor (of foreign-owned banks) and needs to deepen further its cross-border supervision. Its position creates supervisory challenges, including where the Ghanaian entity is not seen by the home supervisor to be significant within the group—likely to be the case for most of the foreign-owned banks in Ghana. This may lead to restricted information flows. The BoG needs to take particular care proactively to maintain communication channels with home supervisors. Many of the formal requirements for effective cross-border supervision are in place—including MoUs with many home supervisors and a supervisory college for WAMZ supervisors. Onsite supervisory work is being undertaken jointly with one home supervisor. However, the BoG is not yet engaged in crisis management preparations with home supervisors or in planning for the implications for its supervision of home supervisors’ recovery and resolution planning.
33. The BoG is not assessing the risks to banks arising from foreign ownership. Because it regulates only foreign-owned subsidiaries and not branches, the BoG can impose the same standards as apply to domestic banks and can restrict intra-group exposures in case of weaknesses in the rest of the group. However, the BoG does not regularly review whether it needs to use its regulatory or supervisory powers to address risks arising from the parent groups or jurisdictions in which they operate; and it allows foreign-owned banks regularly to place large balances with parents and other group members.
Policy recommendations
Finalize and issue the draft regulations and other materials which the supervisors have drafted.
As the BoG plans, prepare high quality draft legislation to effect the changes to the legislation needed to strengthen its powers, including enabling it to issue regulations and to impose administrative penalties.
Enhance prudential standards and supervision, especially for the largest banks, seeking in particular to strengthen capital adequacy and develop full prudential liquidity standards; establish requirements on corporate governance, risk management and controls; apply prudential standards to groups as well as individual banks; and limit scope for forbearance.
Review supervisory strategies for foreign-owned banks including by assessing the risks in relation to reliance on home supervisors and how to address these, for example by limits on bank exposures to their parents and closer cooperation with home supervisors on crisis management and recovery and resolution planning.
Nonbank Financial Sector
A. Overview of Financial Services
34. Ghana has other types of financial institutions, besides commercial banks. (See Table 5 for a description of these institutions). The legal status of these institutions varies from formal (Rural and Community Banks, Savings and Loans); to semi-formal (microfinance companies or “corporate susus”); and finally, informal and unregulated (individual susu and individual money lenders).
35. Access to financial services is low, with only 29.4 percent of adults having an account at a formal institution in Ghana. Comparatively though, the ratio of banked-to-unbanked adults is slightly higher than the average for sub-Saharan Africa (24.1 percent).
36. Although, collectively, these financial institutions have less than 10 percent of the financial system assets.13 They serve over 4 million poor—often rural—people. In 2012, 5.8 percent of adults had taken a loan from a formal institution, while 3.4 percent had taken a loan from an informal private lender.
Types of Financial Institutions Outside Commercial Banks
Types of Financial Institutions Outside Commercial Banks
| Type of institution | Definition and outreach |
|---|---|
| Savings and Loans (S&L) | Mostly focused on consumer, micro and SME finance in urban areas and make loans under $15,000. Minimum capital requirement is $3-5 million. |
| Rural and Community Banks (RCB) | Small banks owned by individual shareholders, with operations limited to within 25 miles radius of the bank. The creation of these institutions in the 1970s was encouraged by BOG, taking preference shares in RCBs as a way to promote financial inclusion in rural areas, and there are 136 RCBs today. Minimum capital requirement is GH¢. 150 000 Minimum deposit size is GH¢ 20 and average lending rates are about 25%. The umbrella association is ARB Apex. |
| Credit Unions | Work-place based or community-based institutions. |
| Microfinance companies (or “corporate susus”) | Small companies intermediating deposits and loans. These companies have proliferated without regulation in the years 2000, competing with RCBs with higher lending rates (which can go above 100% pa) but shorter credit processes. There are 600 microfinance companies but 173 have obtained a license. The umbrella association is the Association of Microfinance companies. |
| Financial NGOs (FNGOs) | Mission-driven organizations lending external donated funds. |
| Individual susu collectors | Collect daily savings from customers at their doorstep and return accumulated amount at the end of the month minus one day’s deposit. Minimum deposit size is GH¢. 1 Some susu collectors have started illegally providing loans based on these deposits. CGAP estimates that there are 3,000-5,000 susu collectors in Ghana serving over half a million customers, with a monthly deposit base of at least US$50 million. Their umbrella association is the Ghana Co-operative Susu Collectors’ Association (GCSCA). |
Types of Financial Institutions Outside Commercial Banks
| Type of institution | Definition and outreach |
|---|---|
| Savings and Loans (S&L) | Mostly focused on consumer, micro and SME finance in urban areas and make loans under $15,000. Minimum capital requirement is $3-5 million. |
| Rural and Community Banks (RCB) | Small banks owned by individual shareholders, with operations limited to within 25 miles radius of the bank. The creation of these institutions in the 1970s was encouraged by BOG, taking preference shares in RCBs as a way to promote financial inclusion in rural areas, and there are 136 RCBs today. Minimum capital requirement is GH¢. 150 000 Minimum deposit size is GH¢ 20 and average lending rates are about 25%. The umbrella association is ARB Apex. |
| Credit Unions | Work-place based or community-based institutions. |
| Microfinance companies (or “corporate susus”) | Small companies intermediating deposits and loans. These companies have proliferated without regulation in the years 2000, competing with RCBs with higher lending rates (which can go above 100% pa) but shorter credit processes. There are 600 microfinance companies but 173 have obtained a license. The umbrella association is the Association of Microfinance companies. |
| Financial NGOs (FNGOs) | Mission-driven organizations lending external donated funds. |
| Individual susu collectors | Collect daily savings from customers at their doorstep and return accumulated amount at the end of the month minus one day’s deposit. Minimum deposit size is GH¢. 1 Some susu collectors have started illegally providing loans based on these deposits. CGAP estimates that there are 3,000-5,000 susu collectors in Ghana serving over half a million customers, with a monthly deposit base of at least US$50 million. Their umbrella association is the Ghana Co-operative Susu Collectors’ Association (GCSCA). |
B. Rural and Community Banks
37. RCBs have become a key channel for financial inclusion, though their weaknesses create significant risks and consolidation is necessary. RCBs have seen 40 percent growth of total assets in 2012, with 700 branches, and a potentially large customer base. Despite strong total asset growth, the NPL ratio for RCBs was 20 percent in 2012 which points to persistent weaknesses in the credit process. Of 136 RCBs, five have not met the required minimum capital and sixteen have a CAR below the required minimum (10 percent). Consolidation is difficult, however, as registries of shareholders for many RCBs need to be updated and/or reconstructed.
38. The BoG supervises RCBs with the assistance of ARB Apex Bank, and realizes that supervision of RCBs still needs improvement. In addition to providing various services to RCBs (liquidity management, mobilization of funds, and training), ARB Apex collects data from all RCBs on a quarterly basis and provides recommendations to the BoG, which could be used when the BOG staff undertakes an annual onsite supervision at each RCB. The enforcement process, however, is slow. For instance, two RCBs that ARB Apex had recommended for closure to BOG two years ago are still not resolved. In the absence of a deposit insurance fund, BOG is reluctant to revoke the license of the weakest RCBs for fear of affecting negatively the confidence in these institutions, as it happened in 2003 when the BOG closed three RCBs.
C. Microfinance Services
39. Guidelines for microfinance institutions issued by BOG in July 2011 have brought clarity to the microfinance sector, though licensing has been slow. 14 The guidelines clarified the different categories of players and their scope of authorized activities, and addressed some of the risks by putting in place capital requirements, operational requirements (corporate governance, information systems) and exposure limits for deposits and loans (see Table 6). These guidelines urged all microfinance companies to obtain a license within six months; however, out of 600 MFIs only 173 have complied and obtained a license.
40. Moreover, the minimum capital requirement is too small to generate economies of scale and reduce operational costs, pushing many of them to finance their fixed assets with deposits. BOG is currently drafting new guidelines to require microfinance companies to comply gradually with higher capital requirements which could go up to GH¢ 1 million for microfinance companies with a national branch network.
41. With effective interest rates that can go above 100 percent per annum, microlending activities raise concerns of over-indebtedness. In urban areas particularly, customers can borrow from multiple sources. A credit bureau including RCBs and microfinance companies needs to be created. Positive steps have been taken in this direction as BOG has engaged with ARB Apex to integrate RCBs to the credit bureau used by commercial banks. The Ghana Micro Finance Institutions Network (GHAMFIN) has created a “Reference center”, but the costs of access to information are perceived too high by microfinance companies.
42. Many commercial banks are linked to microfinance activities. For instance, HFC Bank has entered a joint venture with CHF International to establish Boafo Microfinance services; Fidelity Bank provides lending directly to microfinance companies; while Barclays Bank provides lending to the Ghana Cooperative Susu Collectors Association (GCSCA) which then onlends to susu collectors. The BOG does not monitor these activities and their associated risks.
D. Mobile Banking
43. Although mobile phone penetration is over 100 percent, mobile banking has not taken off in Ghana. Only 1 percent of the population uses a mobile phone to send money compared to an average of 11 percent in Sub-Saharan Africa. Obstacles to mobile banking development range from lack of incentives in the regulation which prohibits exclusive partnerships between banks and mobile network operators (MNO), to the lack of reliability of networks to ineffective advertising from banks.
E. Insurance
44. The Ghanaian insurance sector remains small, with low levels of penetration. The numbers of companies, life and non-life, have not significantly changed since the 2011 FSAP update. Premium income is growing rapidly, especially in life insurance, but from a low base (total for the sector was less than GH¢ 650 million in 2011.) Economic growth and the development of oil and gas are supporting higher demand for insurance. However, penetration (the ratio of insurance premiums to GDP) remains less than 2 percent. The non-life sector continues to contend with high levels of premium payment arrears (over 20 percent of assets at end-2011), reflecting intensive competition (originally related to a surge in new entrants some years ago) as well as poor market practices such as high levels of credit to customers.
45. As in banking, there is significant government engagement with insurance. Government involvement includes state ownership and some government intervention to direct insurance cover to particular customers, which has been useful. For example, CGAP reports on their website that one of their evaluation studies shows that in Ghana, insured farmers bought more fertilizers, planted more acreage, hired more labor, and had higher yields and income, which led to fewer missed meals and fewer missed school days for the children.
46. The insurance regulator is seeking to raise standards and address poor practices. Solvency standards are based on existing EU requirements. The National Insurance Commission is progressing plans for an overhaul of insurance legislation, including a much increased minimum capital requirement designed in part to force industry consolidation. The NIC is also setting limits on credit, introducing corporate governance standards and moving to risk based supervision by 2014. Prospects for much increased penetration seem poor, given persistent high costs.
Policy recommendations
Encourage consolidation among RCBs and resolution of weakest RCBs
Accelerate licensing process for microfinance companies
Increase minimum capital requirement for microfinance companies
Create a credit bureau including RCBs and microfinance companies to address the risks of over indebtedness
Supervise microfinance activities undertaken by banks to monitor associated risks
Role of the State in the Financial System
A. Public Banks
47. The ownership structure of the four public banks brings together diverse public institutions, with different mandates and objectives. Ghana Commercial Bank (GCB), the largest public bank, is jointly controlled by the public pension scheme (SSNIT) and the Ministry of Finance (MoF). The shareholding of Agricultural Development Bank (ADB), the second largest public bank, is split by law between MoF and Bank of Ghana. MoF and Bank of Ghana also control National Investment Bank (NIB), while SSNIT is the dominant shareholder of Merchant bank (MBG). Bank of Ghana’s stakes are held through the Financial Investment Trust (Table 3).
Overview of the Shareholding of the Four Public Banks
(2012)
Overview of the Shareholding of the Four Public Banks
(2012)
| Bank | Main shareholders at end 2012 |
|---|---|
| Ghana Commercial Bank (GCB) | SSNIT: 29.8% |
| MOFEP: 21.4% | |
| Agricultural Development Bank (ADB) | MOFEP: 51.8% |
| BOG (FIT): 48.2% | |
| Merchant bank (MBG) | SSNIT: 90.2% |
| SIC: 9.8% | |
| National Investment Bank (NIB) | MOFEP: 86.4% (55% when counting preference shares) |
| BOG (FIT): 3.5% (45% when counting prefernce shares) |
Overview of the Shareholding of the Four Public Banks
(2012)
| Bank | Main shareholders at end 2012 |
|---|---|
| Ghana Commercial Bank (GCB) | SSNIT: 29.8% |
| MOFEP: 21.4% | |
| Agricultural Development Bank (ADB) | MOFEP: 51.8% |
| BOG (FIT): 48.2% | |
| Merchant bank (MBG) | SSNIT: 90.2% |
| SIC: 9.8% | |
| National Investment Bank (NIB) | MOFEP: 86.4% (55% when counting preference shares) |
| BOG (FIT): 3.5% (45% when counting prefernce shares) |
48. Public banks lost market share, but the two largest remain among the top five banks. Public banks control over a fifth of assets and credit and a quarter of deposits. Their share of bank assets in 2012 is slightly more than half what it was in 2005. The staffing and branch networks of the two largest explain that public banks have a third of all branches and 30 percent of all employees. They operate with thinner capital buffers than their peers (accounting for 16 percent of banks’ shareholders’ funds (Table 4).
Key Financial and Prudential Indicators of Public Banks (2012)
Key Financial and Prudential Indicators of Public Banks (2012)
| Dec 2012 (unless otherwise indicated) |
Ghana Commercial Bank |
Agricultural Development Bank | National Investment Bank |
Merchant Bank | Industry average | |
|---|---|---|---|---|---|---|
| Market share | ||||||
| - Assets | 10.9% | 5.5% | 3.2% | 3.1% | --- | |
| - Credit | 7.1% | 6.7% | 3.4% | 3.0% | --- | |
| - Deposits | 12.3% | 5.2% | 3.4% | 3.3% | --- | |
| - Shareholders’ funds | 7.1% | 5.4% | 2.5% | 1.4% | --- | |
| - Number of branches | 18.5% | 9.2% | 3.3% | 2.4% | --- | |
| - Number of employees | 14.0% | 8.5% | 4.2% | 3.1% | --- | |
| Capital adequacy | ||||||
| Capital adequacy ratio | 17.1% | 11.0% | 19.5% | 7.7% | 18.6% | |
| Credit risk | ||||||
| Credit growth (2012) | 92.8% | 19.8% | 23.5% | 41.8% | 40.0% | |
| Non performing loans /total loans (Sept. 2012) | 28.4% | 9.7% | 23.3% | 3.3% | 12.4% | |
| Provisions /NPLs (Sept. 2012) | 50.0% | 60.4% | 29.6% | 35.0% | 49.5% | |
| (NPLs - Provisions) /own funds (Sept. 2012) | 65.9% | 23.0% | 99.1% | 1.5% | 23.9% | |
| Liquidity | ||||||
| Loan to deposit ratio | 35.7% | 80.8% | 55.7% | 50.5% | 59.7% | |
| Liquid assets /total deposits (Sept 2012) | 47.9% | 25.6% | 27.6% | 27.3% | 49.7% | |
| Profitability | ||||||
| Net interest margin (Sept. 2012) | ||||||
| - Earning assets | 16.0% | 14.1% | 6.3% | 4.7% | 12.3% | |
| - Credit | 13.4% | 20.1% | 11.7% | 18.0% | 16.4% | |
| Return on assets (Sept. 2012) | 7.3% | 2.6% | -1.8% | -2.1% | 5.1% | |
| Return on equity (Sept. 2012) | 64.1% | 17.3% | -18.2% | -25.3% | 27.3% | |
Key Financial and Prudential Indicators of Public Banks (2012)
| Dec 2012 (unless otherwise indicated) |
Ghana Commercial Bank |
Agricultural Development Bank | National Investment Bank |
Merchant Bank | Industry average | |
|---|---|---|---|---|---|---|
| Market share | ||||||
| - Assets | 10.9% | 5.5% | 3.2% | 3.1% | --- | |
| - Credit | 7.1% | 6.7% | 3.4% | 3.0% | --- | |
| - Deposits | 12.3% | 5.2% | 3.4% | 3.3% | --- | |
| - Shareholders’ funds | 7.1% | 5.4% | 2.5% | 1.4% | --- | |
| - Number of branches | 18.5% | 9.2% | 3.3% | 2.4% | --- | |
| - Number of employees | 14.0% | 8.5% | 4.2% | 3.1% | --- | |
| Capital adequacy | ||||||
| Capital adequacy ratio | 17.1% | 11.0% | 19.5% | 7.7% | 18.6% | |
| Credit risk | ||||||
| Credit growth (2012) | 92.8% | 19.8% | 23.5% | 41.8% | 40.0% | |
| Non performing loans /total loans (Sept. 2012) | 28.4% | 9.7% | 23.3% | 3.3% | 12.4% | |
| Provisions /NPLs (Sept. 2012) | 50.0% | 60.4% | 29.6% | 35.0% | 49.5% | |
| (NPLs - Provisions) /own funds (Sept. 2012) | 65.9% | 23.0% | 99.1% | 1.5% | 23.9% | |
| Liquidity | ||||||
| Loan to deposit ratio | 35.7% | 80.8% | 55.7% | 50.5% | 59.7% | |
| Liquid assets /total deposits (Sept 2012) | 47.9% | 25.6% | 27.6% | 27.3% | 49.7% | |
| Profitability | ||||||
| Net interest margin (Sept. 2012) | ||||||
| - Earning assets | 16.0% | 14.1% | 6.3% | 4.7% | 12.3% | |
| - Credit | 13.4% | 20.1% | 11.7% | 18.0% | 16.4% | |
| Return on assets (Sept. 2012) | 7.3% | 2.6% | -1.8% | -2.1% | 5.1% | |
| Return on equity (Sept. 2012) | 64.1% | 17.3% | -18.2% | -25.3% | 27.3% | |
49. Efforts have been successful to improve the governance of these two public banks and initiate their financial and operational restructuring. Senior staff with experience in private banks has been appointed. Initial progress is evident in the risk management and internal control functions (including policies and procedures) and new systems and tools are being introduced to better control risk, improve the speed of decision-taking and facilitate the introduction of new products. Staffing in key control functions often remains insufficient, and additional hiring is contemplated. The Government restructured most of GCB’s exposure to Tema Oil Refinery (TOR), significantly improving the bank’s financial structure.
50. The restructuring of public banks was financed by internally generated funds, as public shareholders provided only limited financial support. This explains the slow progress observed in other cases when necessary resources could not be generated considering their weak financial situation.
51. Two public banks remain weak, and there are significant downside risks of this situation continuing. The impact of these two bank (and their groups) continuing without resolution is that it prevents stronger banks to gain market share and drive improvements in the market such as additional credit at lower cost, and part of bank deposits are not allocated in a productive way (i.e., they finance the carrying cost of past NPLs rather than activities which would support growth going forward). There are reputational risks to BoG’s credibility from forbearance due to perceived favoritism, especially when it is a shareholder. There could be further negative repercussions if there is a loss of confidence in these weak banks that may mean additional fiscal (or BoG’s) exposures.
52. Options going forward short of resolution portend distortions and risks. Muddling through would prevent further gains in financial intermediation; a forced merger with another public bank is being considered though international experience tends to show that such approaches lead to much weaker institutions. At the very least any merger should be explored at arm’s length and involve all potential interested parties; and listing weak institutions on the stock market with still limited screening capacity and with significant retail investors would pose significant risks going forward for market development and orderly resolution. Listing should be for sound, transparent and restructured institutions.
B. Social Security and National Insurance Trust
53. SSNIT’s size relative to the Ghanaian economy is gradually decreasing. Its contributions declined following the 2008 reform, which introduced a three-tier pension system and only gave SSNIT responsibility for the first one (compulsory defined benefit regime). That said, the value of pensions it pays out has significantly increased in 2012, while some contributions were not paid in due time. These trends have negatively impacted the size of its investable resources.
54. SSNIT remains the main local institutional investor, especially for long-term investments. Its investment portfolio was worth 5.9 percent of GDP in September 2012, though lower than it was in 2009 at 7.3 percent of GDP. A third of its assets is invested in equity (with banks representing two thirds of this portfolio), over half in fixed income products (including term lending) and a tenth in alternative investments (e.g. real estate). Investments and lending are managed inhouse, following an investment policy last updated by the Board in 2010.
55. SSNIT’s term deposits in the banking system significantly decreased in 2012. It continues to offer term deposits to banks only at spreads over government bill rates and generally requires full collateralization with government bills. When placing deposits in banks, SSNIT does not differentiate among banks, taking the view that if banks they deposit in face problems, SSNIT should not be affected. Its share of total deposits has significantly declined from 2.1 percent in June 2011 to 0.9 percent in December 2012, partly reflecting the increasing share of demand deposits across the banking system.
56. SSNIT retains large equity stakes in banks, but is divesting its controlling shares gradually. At the end of 2012, SSNIT was the largest shareholder in four banks and had additional stakes in five banks.15 The combined market share of all the banks in which SSNIT had invested in was 52.8 percent in 2008. SSNIT divested its majority stake in The Trust Bank in 2011 (and took a minority stake in the bank which absorbed it) and is in talks to do the same in another bank.
C. Independence of the Supervisor
57. Bank of Ghana (BoG) holds stakes in supervised entities through a trust, which is a major governance concern. BoG holds stakes in four supervised entities, including two banks. These investments are held through the Financial Investment Trust (FIT), a trust set up in the early 2000s with BoG as sole beneficiary. FIT is administered by a four-person Board appointed by BoG and including two of its officials. FIT’s mandates include disposing of BoG stakes in these supervised entities, but no progress was made in this regard in recent years.16
D. Policy Recommendations
58. The Ghanaian authorities should contemplate taking the following measures:
Set a cap on the two troubled banks’ balance sheets so as to limit losses and prepare a structured plan to deal with potential stress in these institutions.
Explore options to divest BOG’s shares in all entities that it supervises.
Assess as part of BOG’s supervisory process whether high rates paid on term deposits by some banks reflect liquidity tensions and take action accordingly
Define in BOG policies how it would deal with a problem bank where SSNIT has an equity stake, to ensure it would be treated similarly as others and prevent moral hazard;
Assess SSNIT’s investment processes and policies as part the on and off-site supervisory process of the National Pension Regulatory Authority (NPRA)
Monetary Policy Framework and Implementation
A. Inflation Targeting: Challenges and Opportunities
59. Inflation targeting was formally introduced in Ghana in 2007 to support financial sector development by anchoring inflation expectations and building confidence. An inflation targeting framework requires a clear understanding of the monetary policy transmission mechanism to achieve a target rate of inflation with the use of monetary policy instruments, notably interest rates. In addition, the traditional channels of monetary transmission through interest rates, bank lending and asset prices require workable institutional frameworks, functioning money and securities markets, and a reasonably competitive banking sector where interest rates respond to changing market conditions and funds are channeled from savers to borrowers as credit to the private sector at affordable costs.
60. While many of the elements of a functioning inflation targeting regime are in place in Ghana, the current policy mix poses challenges. The crowding out of private sector credit as a result of high interest rates due to large public sector borrowing, amplifies the structural problem that the level of private sector credit is relatively low, reducing the impact that monetary policy can have on aggregate demand. In effect, if government demand for borrowed funds raises market rates above the levels at which it is feasible for the private sector to borrow, private expenditure becomes insensitive to bank lending rates. In moving forward, there is also room to generally strengthen the interest rate transmission channel by ensuring that there is an effective policy rate that provides a meaningful signal for expectations as well as a strong pass-through to market interest rates.
B. Liquidity Management Framework
61. Although important progress has been made in developing the monetary policy implementation framework, important challenges remain in the conduct of monetary operations. The change-over to an inflation targeting framework has not resulted in a more fundamental change in liquidity management, which continues to be based on reserve money targeting. Most banks participate in the interbank market, which is predominantly overnight and securitized. The BoG has at its disposal a broad range of instruments as well as a liquidity forecasting framework. Payment and settlement arrangements are advanced and an auction market for treasury securities is functioning well. There are, however, some continuing difficulties with forecasting government expenditures and no systematic analysis is undertaken of forecasting errors. Concerns about the cost of sterilization appear to have at times impacted on BoG’s operations to mop up excess liquidity, and these concerns threaten to undermine the pursuit of BoG’s price stability mandate. More importantly, interbank rates have deviated from the policy rate by more than the targeted corridor, and the policy rate has been overtaken by the Treasury bill rate as the benchmark for market interest rates (Figure 5).
62. Monetary policy implementation has been subject to large swings over the last year. During 2011, monetary policy became gradually looser and interest rates fell to low levels. By early 2012 considerable pressure had built up in the foreign exchange market, and the currency began to depreciate. The BoG tightened monetary policy by increasing the policy rate and intervening in the foreign exchange market. In addition, measures directed toward supporting the domestic currency market were introduced, including changing the denomination of required reserves on foreign currency deposits from foreign to domestic currency and imposing a 100 percent domestic currency cover for banks’ vostro accounts. Although the exchange rate was stabilized, interest rates continued to increase, also driven by increased government borrowing. At the MPC meeting in February 2013, the policy rate was kept unchanged at 15 percent, while interbank rates hovered around 19 percent and the rate for 91-day Treasury bills was 23.12 percent in February.17
Policy Rate and Money Market Interest Rates
(Jan 2007–Dec 2012)
Citation: IMF Staff Country Reports 2013, 187; 10.5089/9781484377673.002.A003
Sources: Bank of Ghana63. For an inflation targeting regime, liquidity management requires a clearer short-term focus to ensure stability and balance in the market for bank reserves, together with improved forecasts, and some adjustment of its instruments. In order to stabilize short term interest rates close to the policy rate, the central bank needs to target banks’ excess reserves, and forward-looking liquidity operations should aim in the longer run to comply with any target path for other monetary variables, such as reserve money. Improved forward-looking liquidity forecasts would include daily forecasts of excess reserves and composition of reserve money, and forecast error. Moreover, while the BoG has available traditional instruments of monetary policy, some redesign and adjusted use of these instruments could be useful for liquidity management including the establishment of standing overnight lending and deposit at interest rates linked to the policy rate; use of repos and reverse repos transactions only on the initiative of the central bank and restricted to bank participation; and an extension of the maintenance period for reserve requirement from one week to at least two weeks while continuing to allow banks to meet the requirement on average over the longer maintenance period.
64. Improved coordination of fiscal and monetary policy will improve liquidity management and hence, the implementation of monetary policy. The three main areas for better coordination include having accurate forecasts of government’s cash flows, and in that regard, improving the new financial systems Ghana Integrated Financial Management Information System (GIFMIS), and establishing a Single Treasury Account (TSA) would be essential; having a clear understanding of cost sharing for the implementation of monetary policy so that cost considerations do not hamper monetary policy objectives; and given shallow debt markets, it would be preferable to conduct monetary operations using Treasury bills since the existence of two similar risk-free instruments—central bank bills and Treasury bills—may hamper market development.
C. Money and Foreign Exchange Markets
Domestic interbank and money market
65. The interbank money market is becoming fairly active with most banks participating (Figure 6). The trading is mostly on an overnight and securitized basis, although the larger banks have established unsecured credit lines with some of their counterparties. Average daily trading turnover fell sharply between 2006 and 2009 (from GH¢ 322 to GH¢ 77 million), but has gradually increased over the last years, reaching GH¢ 203 million in 2012. Daily activity is uneven and to a large extend driven by uncertainty about BoG’s participation.
66. The primary market for government securities is active. There are regular weekly auctions, with an issuance calendar published in advance. Prior to April 2011, all 27 banks, as well as four non-bank financial institutions, were Primary Dealers (PDs). Currently, there are 15 PDs, who are expected to underwrite the auctions and act as market-makers in the secondary market. In practice, however, this arrangement is not enforced.
67. Well functioning money and securities markets would improve the transmission of interest rates. Starting with the interbank market, the suggested reforms of the central bank’s liquidity management would give incentives to banks for a more active planning and management of their own liquidity. Market functioning would also improve if the underlying securities for repos could be traded, in line with international practice.
Interbank Market Activities
(Jan 2008–Mar 2013)
Citation: IMF Staff Country Reports 2013, 187; 10.5089/9781484377673.002.A003
Sources: Bank of GhanaForeign exchange interbank market
68. The foreign exchange market has grown but it remains small in size and dominated by a few players. All the 27 licensed banks are authorized to deal in foreign exchange, but only six are regularly trading and fulfilling their function as market-makers. Daily turnover in the interbank market increased to USD 20 million during 2012, which was a doubling from the previous year (albeit from a low level), in part due to exchange rate pressures experienced in the second half of the year. However, the daily fluctuations in both traded volume and rates are large (Figure 7).
Foreign Exchange Interbank Market
(daily; 2012)
Citation: IMF Staff Country Reports 2013, 187; 10.5089/9781484377673.002.A003
Sources: Bank of Ghana69. A well-functioning foreign exchange market is important for monetary policy implementation and financial sector development. Empirical studies have shown that the passthrough to domestic prices from exchange rate changes is strong and rapid in Ghana, which underscores the link between a stable exchange rate and price stability.18 In an inflation targeting system, however, it is important that this stability is primarily achieved through appropriate macroeconomic policies and not by directly managing the exchange rate. The effective functioning of the foreign exchange market with transparent price discovery in the wholesale interbank market and supportive interventions by the central bank will facilitate risk-taking and confidence by economic agents.
70. Interventions in the foreign exchange market should support the achievement of the BoG’s monetary policy objectives. Given the close link between exchange rate and price movements in Ghana, a weakening currency could result in a build-up of inflationary pressure and hence justify BoG’s action. Furthermore, direct interventions in the foreign exchange market can complement the interest rate transmission channel. However, targeting a particular level of the exchange rate would be inconsistent with an inflation targeting regime. The BoG may still find it necessary to intervene in the foreign exchange market to ensure an orderly market, as bulky transactions in a shallow market could disrupt the market and lead to large swings in the exchange rate unrelated to economic fundamentals. In these situations, it is important to communicate clearly the BoG’s objectives and to emphasize that in the context of a floating exchange rate regime the BoG is not targeting any particular exchange rate level, but intervening to reduce volatility.
D. Policy Recommendations
Strengthen the current liquidity management framework by improved forward-looking liquidity forecasts with focus on banks’ excess reserves and re-design monetary instruments and adjust their use.
Improve coordination between MoF and BoG in the areas of cash flow projections as input to liquidity forecasts, sharing of costs of monetary policy by agreeing on a binding MOU and the continued use of Treasury bills as a monetary policy instrument.
Establish the operational and legal basis for the use of repos as part of interbank trading and for use in a broader money market.
Communicate clearly to the market when BoG is intervening in the foreign exchange market, emphasizing that the central bank is not targeting a particular exchange rate level.
Continue ongoing measures (such as introducing a screen-based information and trading system, intervention at quoted market rates, and a Code of Conduct) to strengthen the operations of the interbank foreign exchange market.
Appendix I. Evolution of Financial Indicators (2002–2011)1
To date, Benin, Senegal, the West African Economic, and Monetary Union and Haiti have been included as pilot cases.
See Appendix II of the accompanying staff report for a discussion of inclusive growth successes and challenges in Ghana
Variations observed over the period 2007-2011 are partly linked to (i) the restructuring of exposures to Tema Oil Refinery (credit partly swapped for a government bond) and (ii) the transfer of portfolios of non-performing loans to (non-bank) special purpose vehicles.
In 2011, credit to GDP was 18 percent for the regional median, 32 percent for the income median, 15 percent in Uganda, 17 percent in Tanzania, 19 percent in Cote d’Ivoire, 24 percent in Mozambique and 30 percent in Senegal. The panel regression model controls for per capita income, population size, population size and demographic profiles (see Beck & al., benchmarking financial development, World Bank, 2008).
In 2011, Ecobank took over the The Trust Bank, a public bank then controlled by the public pension scheme SSNIT. The Trust Bank controlled 2.6 percent of bank assets at the end of 2011.
“Value chain” refers to all the activities and services that bring a product (or a service) from conception to end use in a particular industry—from input supply to production, processing, wholesale and finally, retail.
The four public banks still control a third of all bank branches, with a particularly strong presence in remote areas for the largest one.
In 2011, operational cost to GDP was 4.4 percent for the regional median, 3.9 percent for the income median, 6.5 percent in Uganda, 5.3 percent in Tanzania, 5.6 percent in Cote d’Ivoire, 7.2 percent in Mozambique and 4.4 percent in Senegal. The value predicted by a panel regression model was 4.2 percent.
A summary of progress on implementing the FSAP key policy recommendations is included in the Staff Report.
Staff did not review draft documents in detail.
The new requirement was applied earlier (from 2010) to foreign-owned banks than to others (December 2012), reflecting the difficulties which the domestic banks had in meeting the requirement.
BoG supervisors should also monitor the basis (rates and other conditions such as collateral) on which banks are accepting term deposits and respond to any outliers
Data in this section was taken from the WB publication “The Little Data Book of Financial Inclusion 2012”, CGAP documentation, and interviews with Ghamfin and BSD.
At the end of 2012, SSNIT was the largest shareholders of MBG (90.2 percent), CAL bank (33.2 percent), GCB (29.8 percent) and HFC (26.2 percent). It also had stakes in Fidelity (14.9 percent), Prudential (4.7 percent), Standard Chartered (14.3 percent), SG-SSB (21.6 percent) and Ecobank (13.9 percent).
Staff was informed that a stake in HFC bank was disposed off soon after the trust was established
The policy rate determines the interest rates used in the BoG’s open market operations. At the present level of the policy rate (15 percent), banks may borrow at 17 percent (policy rate +2 percentage points) and place funds at 14 percent (policy rate –1 percentage points); however, only at the discretion of the central bank. Excess reserves are not remunerated.
“Does Money Matter for Inflation in Ghana”; IMF WP/11/274.
