Selected Issues Paper
Financial Stability on the Road to Recovery1
The Ghanaian financial system has grown substantially during the past years, with total assets reaching 54 percent of GDP 2019. However, internal controls and risk management practices of financial institutions have not always kept up with the industry’s growth, as evidenced by a steady increase in nonperforming loans during the past years and, more recently, several high-profile banking failures. While reforms have been stepped up in response, it has also become clear that fragilities extend well beyond the banking sector, with specialized deposit-taking institutions and fund managers also facing distress. This Selected Issues Paper (SIP) takes stock of key developments in the Ghanaian financial sector, with the aim to identify priorities to further buttress resilience and support the alignment of the oversight framework with international best practices.
1. Ghana’s financial system is dominated by the banking sector. As of June 2019, universal banks account for 70 percent of total financial system assets (38 percent of GDP), followed by securities and exchange sector (14 percent) and the pension sector (13 percent). But while the banking system continues to be the system’s main pillar, growth has moderated in recent years as non-banking institutions are becoming increasingly important.
2. The banking sector has undergone major transformation during the past few years. While the relative size of the banking system has declined modestly during recent years, reaching 38 percent of GDP in 2019, banking assets have more than doubled since 2014. The system is comprised of 24 banks, 14 of which (representing almost 60 percent of banking system assets) are at least in part foreign-owned.2 Concentration has increased in recent years due to mergers and (mandatory) exits, with the Bank of Ghana (BoG) having closed nine banks since August 2017. Largely because of resolution proceedings, public sector involvement has also increased, with the government (excluding equity investments held by the Social Security and National Insurance Trust or SSNIT) owning three banks (Agricultural Development Bank, National Investment Bank and Consolidated Bank Ghana, established as a state-owned bridge bank in August 2018) and holding a minority equity stake in a fourth (GCB Bank).3 Banks’ balance sheets largely consist of loans and advances, securities holdings and deposits, with some public-sector crowding out in recent years as banks’ asset composition has shifted from private-sector lending to government securities.
3. Substantial banking sector weaknesses have necessitated multiple interventions in recent years.4 Capital deficiencies and other regulatory breaches identified by the BoG prompted license revocations for nine institutions, including uniBank, one of Ghana’s top five banks. The BoG’s interventions have helped maintain depositor confidence, albeit at substantial cost for taxpayers as the various operations have fully protected depositors and other creditors to avoid an erosion of confidence (box 1). The ongoing cleanup of specialized deposit-taking institutions and restructuring of a weak state-owned bank, discussed later in this document, is expected to generate further costs.
4. Enhancements of the institutional framework are helping to buttress financial sector oversight. The establishment of the Financial Stability Council (FSC)5 has provided the authorities with an important platform for inter-agency coordination, with the aim to reinforce the identification of financial sector vulnerabilities, and cross-sectoral risks in particular, and support crisis preparedness. In addition, the entry into force of the new Deposit Protection Scheme (DPS), administrated by the Ghana Deposit Protection Corporation, as of end September 2019 is an important step towards strengthening the financial safety net—although some scope for further improvement of the DPS remains.
Banking Sector Restructuring
Strengthening the resilience of the financial sector has been one of the key pillars of Ghana’s recently-completed Extended Credit Facility. During 2016, the BoG (in consultation with Fund staff) developed a roadmap for buttressing banking sector resilience amidst increasing credit risks and lagging provisioning levels (partly reflecting regulatory forbearance in previous years). Cornerstone was an Asset Quality Review (AQR) to gauge vulnerabilities and identify capital needs (if any) for all banks active in Ghana. Upon its completion in March 2017, the AQR had identified nine banks as undercapitalized, with an aggregate capital shortfall of about 1.6 percent of GDP (IMF Country Report No. 17/262).
While most banks were able to address their capital shortfalls, the BoG was forced to intervene two in August 2017, in view of deep insolvency and a lack of credible recapitalization plans. The interventions were effected via transfers of selected assets and liabilities to one of the largest (and partly state-owned) banks, with the government providing the assuming bank with government securities to cover the asset shortfall (the relevant securities were issued in early 2018, after the exact split of assets and liabilities had been finalized). PricewaterhouseCoopers was appointed to liquidate the remnants of the failed banks.
Implementation of the banking sector roadmap met additional challenges in subsequent years. Onsite inspections conducted by the BoG in late 2017 and early 2018 highlighted further underprovisioning in some institutions, and in turn triggered the appointment of an official administrator at UniBank (one of Ghana’s largest banks). By early July, it had become clear that prudential reports for UniBank were largely inaccurate and that the bank was, in fact, insolvent. Given the absence of credible rehabilitation prospects, the BoG decided to resolve the bank in August 2018, together with four other smaller troubled banks.1/ A state-owned bridge bank, Consolidated Bank Ghana, was created to receive good assets and liabilities of the resolved banks, with the government (again) covering the gap between assets and liabilities by providing the bridge bank with special resolution bonds. In January 2019, two more banks were closed via similar operations, supported by another tranche of resolution bonds. The Government plans to privatize the bridge in the medium term. Weaknesses in other sectors, excluded in the figure below and discussed in more detail later, have further increased costs.
Ghana: Banking sector costs, 2018–2019
Ghana: Banking sector costs, 2018–2019
|(GHc billion)||(percent of GDP)|
|Financial sector costs||10.3||1.5||3.4||0.4|
|Resolution of UT Bank and Capital Bank||2.2||0.7|
|Resolution of uniBank, The Royal Bank and||7.6||2.5|
|Equity injection bridge bank||0.5||0.1|
|Resolution Premium Bank and Heritage Bank||1.5||0.4|
Ghana: Banking sector costs, 2018–2019
|(GHc billion)||(percent of GDP)|
|Financial sector costs||10.3||1.5||3.4||0.4|
|Resolution of UT Bank and Capital Bank||2.2||0.7|
|Resolution of uniBank, The Royal Bank and||7.6||2.5|
|Equity injection bridge bank||0.5||0.1|
|Resolution Premium Bank and Heritage Bank||1.5||0.4|
5. Financial inclusion remains limited in some areas and across certain demographics.6 As per the World Bank’s Findex survey, the share of Ghanaians with access to formal financial services rose from 29 to 58 percent during 2011–2017, in part buoyed by mobile money accounts. However, access is lagging among the poor, and the five poorest regions (Upper West, Northern, Volta, Upper East, and Brong-Ahafo) remain the least financially included. Rural access to financial accounts has roughly doubled, reaching 53 percent in 2017, partly reflecting the footprint of the small rural and community banks (RCB). Financial access for men is generally greater than for woman (62 percent vis-à-vis 54 percent). The strong contribution of mobile money is supported by increased product offerings (e.g., micro-credit loans) and interoperability across providers and between providers and banks, which has increased convenience and efficiency for end-users.
B. Banking Sector Conditions
6. Aggregate banking sector capitalization has increased substantially in recent years. The sharp increase in minimum statutory capital, announced by the Bank of Ghana in September 20177 has helped boost the systemwide capital adequacy ratio (CAR) to almost 22 percent in December 2018 (up from 18 percent in 2014). While the increase partly reflects banks’ efforts to raise fresh equity and/or capitalize income surplus, changes in banks’ asset mix also contributed to the improvement as increased investments in government securities attracted lower risk weights.8 Moreover, a small number of banks, including a large state-owned bank, continue to faces shortfalls as the operationalization of Ghana Amalgamated Trust (GAT), the government’s special purpose vehicle that is seeking to mobilize private sector funds to support indigenous banks, has encountered delays.9
7. Credit growth is showing signs of recovery, but asset quality remains a concern. Year-on-year growth in private sector credit reached 17 percent in June 2019, amidst evidence of easing credit conditions. However, while credit is increasing, the aggregate nonperforming loans (NPL) ratio is plateauing around 18 percent, following a sharp decline during the first half of 2018. The large share of loans classified as ‘loss’ in systemwide NPLs points to banks’ inability to effectively recover distressed loans—partly due to weaknesses in the legislative and institutional framework for insolvency and creditor rights—and suggests that further write-offs may be needed to help clean banks’ balance sheets (also see Box 4 for a discussion of the authorities’ strategy for reducing the NPL overhang). NPLs are particularly high for agriculture and electricity, gas and water (34 and 31 percent, respectively), with two state-owned banks posting some of the highest NPL ratios of the banking system (39 and 47 percent, respectively).
8. Firm-specific variations underscore the importance of closely monitoring liquidity risks, notwithstanding excess liquidity overall. The current regulatory framework does not include minimum liquidity requirements10, although banks submit various prudential returns (maturity gap report and top 20 depositors) and the BoG monitors several liquidity metrics. The gradual reallocation of cash holdings to government securities, as part of banks’ efforts to increase earnings, has enabled a steady improvement of the ratio between liquid assets (broad definition) and short-term liabilities to around 76 percent (as of June 2019, the banking sector held about 25 percent of all outstanding government securities). Aggregate metrics, however, may veil institution-specific fragilities, as illustrated by utilization by some banks of (largely uncollateralized) liquidity support from the BoG to cover liquidity shortfalls (e.g. prompted by deposit outflows and repayment of external debt obligations). While the BoG has been able to realize some recoveries on these exposures, more than 1 percent of GDP remains outstanding as claims on the receiverships that were created as part of the bank closures during 2017–2019, on top of an aggregate exposure on ‘going concern’ institutions of about 0.15 percent of GDP.
9. High operational costs point to banking sector inefficiencies, even though profitability has improved. As of June 2019, after-tax profit amounted to GHc 1.67 bn, representing a year-on-year increase of 36 percent. Profitability was supported by relatively high interest income from banks’ large holdings of government securities, with investment income accounting for almost 45 percent of total (up from 29.5 percent in December 2015). At the same time, the share of both interest income and fees and commissions has declined to about 35 and 12 percent, respectively. Improved performance of the banking sector reflected positively on the main profitability indicators, even though they remain below pre-crisis levels. The sector’s cost-to-income ratio has hovered around 80 percent for the past few years, as operational costs remain relatively high—including in comparison with other sub-Saharan countries. Staff analysis suggests high operating costs are a drag to financial intermediation, as bank lending rates have not fully responded to the sizeable reduction in funding costs (Box 2).
Credit to Private Sector and Financial Intermediation Costs
Access to credit remains a bottleneck to diversification and sustained economic growth in Ghana. According to the World Bank’s Doing business, Ghana ranked 80 over 190 in 2019 in terms of ease to get credit, unchanged from 2018. From a financial cycle viewpoint, credit to the private sector has been anemic, with nominal growth rates about 14 percent in 2019–19, but it is recovering progressively from an excessive expansion followed by an extensive cleanup of the financial sector.
Of concerns are the persistently high bank lending rates despite a sharp reduction of the cost of funds since 2017—the monetary policy rate has been reduced by more than 900bp. Lending rates tend to reflect costly financial intermediation in Ghana as measured by interest rate spread or margins. Using the standard accounting approach developed by Randall (1998), the interest rate margin can be decomposed into profit and cost components, with the costs including reserve requirements, operational costs, and provision for loan losses. This decomposition is applied to the Ghanaian banks that have remained active after the banking sector cleanup, using annual data over 2014–2018 from Bankscope.
Bank intermediation costs in Ghana share many features of banking systems in the region. High profit margins are driving high net interest margin, which is consistent with both significant market power and a high-risk premium (also see Annex II). The level of the cash reserve requirement does not play a significant role, in line with the sector’s excess liquidity. Surprisingly, loan loss provisions do not seem to impact intermediation costs as much as expected given high NPL rates, most likely due to under-provisioning of NPLs and/or due to banks’ claims to the Government being a relatively important portion of banks’ interest-bearing assets. After 2017, more stringent application of loan classification requirements and earlier loss recognition led to an increase in NPLs 22.7 percent in December 2017 which may not be captured by the data. Similarly, Beck et al (2011) showed that loan loss provisions and reserve requirements tend to be minor components of bank intermediation costs in Africa, while high operating costs are rather important.
Bank intermediation costs are disproportional driven by operating costs, half of which are personnel expenses. High operating costs are associated with many branches and high personal expenses. There are exceptions, however: UBA, for example, whose business model relies on digital banking platforms across Africa, has very low overhead costs thanks to few branches and relatively small staff. Accordingly, operating costs account for a much smaller share of the bank’s interest rate margin.
The analysis suggests that improving operational efficiency and addressing issues around collateral recovery (with the aim to reduce provisioning requirements) are crucial to lower lending rates and improve access to credit. In this respect, leveraging both data and digital solutions to support financial intermediation and better service provision offers promising avenues (Geiger, 2019). In addition, addressing issues around land tenure, acquisition, and administration will help mitigate risk premium born from lack of good collateral. It would also make Ghana’s modern collateral registry work more effectively.
Prepared by: Albert Touna Mama (IMF Resident Representative in Ghana), with assistance from Mark Edem (University of Ghana-Legon). References: Randall, R., 1998, “Interest Rate Spreads in the Eastern Caribbean,” IMF Working Paper 98/59 (Washington, DC: IMF). Beck, T.; Maimbo, S. M.; Faye, I.; Triki, T., 2011. Financing Africa: through the crisis and beyond. (Washington, DC: World Bank). Geiger, M. T.; Kwakye, K. G.; Vicente, C. L.; Wiafe, B. M.; Boakye Adjei, N. Y., 2019. Fourth Ghana Economic Update: Enhancing Financial Inclusion – Africa Region. Ghana Economic Update; no. 4. (Washington, D.C: World Bank Group).
10. The various banking failures that materialized during 2017–2019 have raised concerns about financial sector governance. Weaknesses in loan origination and credit risk management have exposed banks to elevated credit risks, as also illustrated by elevated NPL ratios. Although interventions were prompted by financial fragilities (i.e., balance sheet erosion and/or immediate liquidity concerns), the materialization of such weaknesses can consistently be tied to poor corporate governance and, in many instances, allegations of more nefarious actions such as insider-dealing and fraud (e.g. related-party transactions and/or manipulation of financial records). The large number of distressed institutions that had to be intervened also raises concerns about the risk culture in the financial sector, with institutions engaging in excessive risk-taking and senior management and bank owners not acting in the interest of customers, staff and other stakeholders.
C. Non-Bank Deposit-Taking Institutions
11. Ghana has a large universe of non-bank deposit taking institutions that traditionally direct their activities towards the lesser-included segments of the population. These specialized deposit-taking institutions (SDI), which collectively accounted for almost 7 percent of financial sector assets, include microfinance and micro credit companies; rural and community banks (RCBs); savings and loans companies (S&L); and finance houses (FH). Most of them are regulated and supervised by the BoG, but supervisory functions for the RCB have been delegated to ARB Apex Bank, established in 2001 as a ‘mini’ central bank for the RCBs. In addition, financial services are provided by various semi-formal institutions that include susu collectors11 (operating under the oversight of the Ghana Co-operative Susu Collectors Association) and credit unions (regulated and supervised by the Ghana Co-Operatives Credit Unions Association).
12. Weaknesses among many SDI necessitated a comprehensive restructuring of the subsector. In May 2019, the BoG announced the license revocation of 386 microfinance and microcredit companies, many of which had already ceased operations without settling deposit balances. As elucidated in its official notice12, fragilities can be tied to poor corporate governance and risk management, unsustainable business models and, in some cases, fraud—exacerbated by supervisory challenges that partly reflected resource constraints and weaknesses in licensing procedures. In August 2019, the BoG intervened 23 S&L and FH that were unable to address longstanding shortcomings, including breaches of statutory capital requirements, excessive risk-taking, financing of related-party transactions with depositor funds, underprovisioning, persistent loss-making and weak board oversight and accountability—which prudential concerns in some cases going back multiple years.13 While the costs of reimbursing depositors (initially up to GHc 10,000 per account) remain to be determined as validation of deposit balances is still ongoing, initial estimates (excluding potential recoveries) point to at least 0.6 percent of GDP.
13. Although RCBs have generally fared better than other SDI, residual weaknesses still require supervisory attention. Generally speaking, RCBs have a relatively higher rate of compliance with statutory minimum capital requirements than other SDIs and deposit balances have continued to grow, although not as fast as in the banking sector. However, capital and/or liquidity shortfalls continue to persist across the subsector, and resource limitations at ARB Apex Bank may undermine supervisory effectiveness. As the recently announced revised deadline14 (from December 2017 to February 2020) for increasing minimum statutory capital to GHc 1 million may incentivize some RCBs to pursue mergers, a careful assessment of the prospective financial position, business model and envisaged risk profile of combined entities is essential to help ensure their future sustainability.
D. Non-Bank Financial Institutions
14. Ghana’s capital market, although developing, is playing a relatively small role in long-term financing of the economy. As of end-March 2019, there were 33 companies listed (36 at end-2017) on the Ghana Stock Exchange (GSE), with another five on the Alternative Exchange. Market capitalization stood around 17 percent of GDP, down from 21 percent year-on-year. Market trends have been negative for some time, with low trading volumes and a steady decline of the GSE’s composite index. The market is highly concentrated, with the three largest listed companies (active in the mining and telecom sectors) accounting for more than 70 percent of market capitalization. The bond market has grown in recent years but remains dominated by government securities.
15. The fund management industry is showing signs of distress Rapid growth of assets under management (including from retail investors that were attracted by promised returns) came to a halt in 2018 as the industry experienced withdrawals and investment losses. Fund managers, in particular, are facing challenges as many have been unable to honor redemption requests (as also evidenced by increasing complaints, see below), prompting the SEC to revoke the licenses of 53 fund management companies in November.15 While the inability to repay partly stems from their inability to unwind investments—with fund managers having taken increasingly greater risks to cover fixed returns promised to their clients—exposures to related parties, sectoral concentrations (i.e., placements with resolved banks and SDI) and governance-related weaknesses have exacerbated the situation. Limited resources and a high workload (among others related to routine activities such as license applications and off-site analysis) have precluded the Funds Management Department of the Securities and Exchange Commission (SEC) from meeting annual inspection targets.
Ghana: Capital Market Developments
Ghana: Capital Market Developments
Ghana: Capital Market Developments
16. The insurance sector comprises a relatively small but fast-growing part of Ghana’s financial system. As of December 2018, the sector included 29 non-life insurers (predominantly engaged in motor insurance), 24 life insurance companies, 82 intermediaries and three reinsurers; with five new companies receiving a license from the National Insurance Commission during the year. Insurance penetration rate remains low at 1.15 percent with only 30 percent of the Ghanaian population enjoying insurance coverage, even though gross written premiums (almost GHc 3 bn as of December 2018) continue to grow at a brisk pace (21 percent in 2018, compared to 27 percent in 2017). Investments largely consist of government securities and deposits.
17. More robust underwriting practices are critically important to improve resilience and achieve sustainable growth of the sector. Declining profitability (GHc 204 million in 2018 vis-à-vis GHc 245 million in 2017) and continued reliance on investment income to cover persistent underwriting losses raise concerns about the sector’s capacity to effectively deepen insurance penetration (Box 3).
Developments in the Insurance Sector During 2018
Annual growth of capital and surplus of the has steadily decelerated since 2014 (e.g., from 19 percent in 2017 to 7 percent in 2018) with nine firms—including three that only commenced operations in 2018— recording a decline in 2018.
While the sector remains profitable, return on assets has been sluggish since 2014, with nine companies (including SIC Insurance, the country’s largest insurance company that is partly owned by the Ghanaian government) recording losses during 2018. The industry’s investment yield averaged 15 percent in 2018 (down from 18 percent in 2014), with seven firms reporting an investment performance of 10 percent or less. A handful of firms (excluding new entrants recorded expense ratios (operational expenses as a percentage of net inflows from policy holders) between 80–150 percent.
The policy holder benefit ratio (total investments to actuarial liabilities) declined by 26 percent during the past three years, reaching 190 percent in 2018—with two firms recording ratios below 100 percent. Policyholder inflows grew by 24 percent in 2018, slightly below the five-year average for the sector.
Gross written premium increased by 10 percent during 2018, comparable to the rate observed for 2017 but well below the five-year average.
Capital and surplus of the industry continues to increase—albeit slower than in previous years and with 20 percent of the industry reporting a decline.
Gross insurance risk (gross written premiums to equity) for the industry has gradually reduced since 2014, although with substantial variation across individual firms (above 200 percent for six out of 33 firms, and above 300 percent for two).
While the industry’s return on assets is showing some signs of improvement, investment returns have dropped to 10 percent (with about one-third of all firms recording returns below the industry average); while (i) the expense ratio (total expenses to net earned premiums) of 99 percent (with 14 firms recording a ratio above 100 percent) and (ii) combined ratio of 142 percent (with all except five companies recording ratios above 100 percent) point to substantial inefficiencies.
Trends in the industry’s technical reserve cover (technical provisions divided by liquid investments) raise concerns, with a third of all firms recording ratios close to or above 100 percent—implying that they are not holding sufficient liquid investments to cover their technical provisions.
18. The uptick in complaints about non-bank institutions underscores the importance of improving market conduct. While insurance-related complaints lodged with the National Insurance Commission (NIC) steadily declined during 2014–2017, a substantial spike can be observed for 2018, with one life insurance company (placed under enforcement action during 2018) accounting for almost 40 percent16 A similar pattern applies to the securities sector, with complaints rising from 255 (cumulative) in March 2018 to 1019 in March 2019. For the insurance sector, claims largely related to repudiation and delays in settlement and payment, unauthorized premium deductions and delayed refunds, delays in the processing of matured policies and perceived low surrender values; while securities-related claims were triggered by non-payment of redemption requests, failure to provide account statements, missing shares delays in executing transactions, and failure to honor assignments. Although more than 50 percent of the insurance-related complaints could be resolved through intervention of the NIC, it is noticeable that the claims ratios (net claims incurred divided by net earned premiums) of the companies with the most complaints are lagging the industry average—which may be indicative of overly restrictive claims handling and/or unfair treatment of customers. For securities firms, 75 percent of the claims remains outstanding.
19. The pensions sector has experienced modest growth in recent years, but pension coverage remains low. Since 2008, when the National Pensions Act (Act 766) was adopted, the Ghanaian pension system is comprised of three pillars, comprising a mandatory defined-benefit scheme (first tier) that provides basic financial support to contributors based on age and invalidity (administered by SSNIT); a compulsory, defined contribution scheme (second tier) managed by the private sector that provides an additional lump-sum payment at retirement; and a voluntary scheme (third tier) based on defined contributions and supported by tax incentives for workers in the informal and formal sectors. As of end-2015, both the first and second tiers had about 1.2 million members, but lagging membership of the third tier (slightly below 149.000 individuals) underscores the challenge of extending pension coverage to the informal sector.17 SSNIT’s position in the pension sector has gradually declined to below 40 percent but it remains Ghana’s largest institutional investor with extensive equity investments in GSE-listed and unlisted companies, commercial real estate and housing projects.
E. Supervisory and Regulatory Framework
20. Ghana has made great strides in overhauling the regulatory and supervisory framework for the banking sector. Important milestones include:
The adoption of the Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930) that, among others, increased the BoG’s supervisory powers, introduced the registration requirements for financial holding companies, imposed personal liability for principal officers or directors of a financial institution for non-compliance with regulatory requirements and strengthened provisions for dealing with failing institutions;
A new Capital Requirements Directive (CRD), prepared with the aid of IMF technical assistance, that governs the definition and composition of regulatory capital and prescribes capital adequacy standards for credit risk, operational risk and market risk. A complementary (draft) Risk Management Directive will lay out more detailed requirements regarding institutions’ risk management frameworks;
Various directives (e.g. on corporate governance, fit and proper criteria, cyber risks and IT security and voluntary winding-up) and consultative documents (e.g., on mergers and acquisitions and financial holding companies); and
Steady improvements in off-site supervision, supported by IMF technical assistance, that have increased the quality of periodic supervisory analyses and have contributed to more robust (internal) discussions of quarterly performance reports of supervised institutions.
21. The BoG intends to further strengthen its prudential framework via the implementation of Basel Pillar 2 requirements. From a regulatory perspective, the aim of the Pillar 2 process is to enhance the link between institutions’ risk profiles, their risk management and risk mitigation systems, and their capital planning. The introduction of a Pillar 2 framework would usefully complement the CRD and help to further strengthen banks’ risk management, including vis-à-vis risks that are not yet captured by the minimum capital requirements that form part of Pillar 1 (e.g., concentration risk, which has historically been a relevant risk factor for Ghanaian banks). Thus, the rollout of a Pillar 2 framework also presents an opportunity for the BoG to deepen its analysis of (the viability of) banks’ business models—a key component of the Supervisory Review and Evaluation Process.
22. Prudential minimum requirements for bank liquidity have been under consideration for several years but have not yet been finalized. While current regulatory reporting requirements provide useful metrics on bank liquidity, such reporting per se—in the absence of clearly prescribed minimum requirements and thresholds—does not provide sufficient assurances that liquidity risks are being effectively managed.
23. Robust implementation of the BoG’s new Directives on corporate governance and fit and proper persons should help foster the adoption of sound governance principles. Acknowledging the critical role that banks’ boards and senior management members play in setting strategic objectives, establishing effective control frameworks and undertaking licensed activities in a sustainable manner, the BoG issued a comprehensive Directive on bank governance for deposit-taking institutions. Leveraging international best practice, the Directive lays out detailed requirements, among others, responsibilities and composition of banks’ boards (including the role of independent directors); risk management and internal control; and remuneration policies. Together with new standards on the fitness and propriety of directors, senior managers and controlling shareholders, as well as forthcoming (detailed) guidance on risk management, the BoG seeks to catalyze improvements of management effectiveness and risk control across the sector.
24. The BoG’s NPL resolution strategy underscores the authorities’ commitment to address the overhang of distressed debt that is burdening the banking system. Following an 85 percent growth in outstanding NPLs during 2015–2017 (from GHc 4.42 billion to GHc 8.19), the BoG has acknowledged the importance of reducing outstanding NPL to ensure that banks’ credit channel can adequately support sustained economic growth. Against this backdrop, an NPL resolution strategy has been developed (box 4), factoring in suggestions from IMF staff. As part of its efforts to reduce NPLs, the BoG has stepped up enforcement of its prudential write-off requirements, which require banks to submit all loans classified as ‘loss’ for over two years (i.e. loans that have been overdue for at least three years), and with 100 percent loan loss provisioning, to the BoG for write-off. However, as noted in para. 7, the share of loans classified as ‘loss’ in the stock of outstanding NPL (almost bn as of August 2019) remains high.
25. The BoG has provided further guidance to the banking industry on the preparation of financial statements, in accordance with applicable accounting standards. As of 2018, Ghanaian banks are required to prepare their financial statements in accordance with IFRS 9 which, among other objectives, seeks to ensure earlier recognition of impairment losses on loans and receivables through a forward-looking approach to measuring credit losses loans. A first version of the Guide for Financial Publication was issued in November 2016 and a second iteration is currently being finalized.
NPL Resolution in Ghana
Credit trends in Ghana can be explained, at least in part, by the steady increase of NPLs during the past years. NPLs adversely impact credit supply and loan pricing as banks tighten their credit stance and increase lending rates to offset rising credit losses, while also suppressing credit demand as overindebted borrowers tend to delay new credit applications. As cross-country experiences have repeatedly shown, these dynamics can trigger a vicious cycle whereby low asset quality and decreasing lending activity erodes bank profitability, hampering banks’ ability to clean up their balance sheets and thus support economic growth.
The BoG’s resolution strategy is organized around three pillars.
First, the BoG aims to leverage its role of supervisor to foster NPL resolution to address both the stock and flow of NPLs, e.g. through enforcement of its write-off requirements, promoting better risk management and stronger underwriting practices and require the establishment of dedicated recovery units of individual banks (although detailed guidance on the latter has not been publicly disclosed).
Second, it is promoting improvements in the Ghanaian credit infrastructure to mitigate credit risks for banks and support private-sector initiatives to develop a market for distressed debt. For example, efforts are ongoing to review the Borrowers and Lenders Act, 2008 (Act 773) to better support loan recovery by banks; and to strengthen the Credit Reporting Act, 2007 (Act 726) to improve (the utilization of) the credit reporting system.
Third, it is seeking to facilitate debt workouts and enforcement of creditor rights through insolvency and debt enforcement reforms. While the finalization of such reforms falls outside the BoG’s direct purview, it is liaising with key stakeholders (e.g., Ministry of Justice, Attorney-General’s office, Ghana Association of Restructuring and Insolvency Advisors) to ensure that observed bottlenecks are addressed. Moreover, it has organized sensitization programs on banking operations for the judiciary.
Although adoption of the NPL resolution strategy is laudable, concerted efforts remain necessary to substantially reduce the stock of distressed loans. Swift finalization of insolvency and debt enforcement reforms would enable more effective recovery of distressed loans by the industry, and thus enable a redeployment of scarce resources towards sustainable credit operations. However, this does not diminish the importance of writing-off loans deemed unrecoverable in a timely fashion (as per IFRS 9). Against this backdrop, a careful review of the BoG’s write-off requirements is advisable, as the current two-year timeframe does not provide sufficient incentives to ensure timely loss recognition; and the required approval by the BoG for loans that exceed a de minimis threshold blurs accountability and may generate delays in balance sheet clean-up. Moreover, implementation of the strategy would benefit from (i) the specification of timebound actions and clearly assigned responsibilities; (ii) involvement of other agencies (e.g. Ghana Revenue Authority to review potential tax disincentives for write-offs and workouts); and (iii) top-down monitoring of (the effectiveness of) agreed actions by an intra-agency working group.
26. To support implementation of the new regulatory architecture, the BoG has taken steps to boost its supervisory capacity. While the number of supervised institutions has diminished, resourcing allocated to the supervision of banks and SDI has steadily increased during the past years, with the 2020 budget allowing for 120 and 139 staff, respectively (up from 83 and 56 in 2015). The BoG has also increased its focus on capacity development—including through trainings and workshops (e.g. IFRS9, market and liquidity risk, consolidated supervision, cybersecurity)—and quality assurance.
27. Efforts to strengthen the supervisory and regulatory framework for non-bank financial institutions are in train. In August 2018, the NIC finalized its four-year strategic plan for strengthening the sector and improving insurance penetration. Measures envisaged in the plan include the passage of a new Insurance Bill; steps to improve supervisory effectiveness (including the issuance of supervisory risk ratings for all insurance companies and the roll-out of a risk-based capital framework); and efforts to strengthen capacity of the NIB and the industry in areas such as accounting and financial reporting, actuarial practices, governance and risk management. Following the adoption of the Securities Industry Act, 2016 (Act 929),18 the SEC aims to strengthen the regulatory framework through the adoption of various (draft) guidelines and regulations (e.g., corporate governance code for listed companies; business conduct regulations; and guidelines on licensing and financial resources of securities firms). In addition, both agencies are working to improve compliance with international best practices, e.g., by aligning the contents of the (draft) Insurance Bill with the IAIS’ Insurance Core Principles.
28. The FSC is helping to deepen oversight of cross-sectoral financial stability trends. A steady increase of financial sector interconnectedness poses distinct risks, as illustrated by observed spillovers of the banking failures to non-bank financial institutions (e.g., SDI and fund managers). Further enhancements of the framework for systemic risk monitoring (including stress testing tools) and the macroprudential toolkit would help underpin the FSC’s effectiveness, while careful communications (e.g., via a periodic financial stability report and publication of meeting records) would help manage public expectations and bolster accountability. In parallel, the FSC should guide the development of crisis management plans and help test their effectiveness through periodic simulations.
F. Concluding Remarks
29. While actions taken by the BoG have helped underpin confidence in deposit-taking institutions, further efforts to strengthen the financial sector remain necessary. For the banking sector, the capital shortfall and structural loss-making of a state-owned bank require recapitalization and/or wind-down options, based on ‘least-cost’ considerations. Also, measures to reduce the overhang of NPL require acceleration; banking sector efficiency could be improved; and actions to boost the earnings potential of the bridge bank would benefit medium-term privatization prospects. For SDI, reimbursement of eligible depositors should be completed as quickly as possible, while respecting the upfront reimbursement cap of GHc 10,000 (with deviations solely motivated by systemic risk considerations, as informed by transparent criteria). Residual weaknesses in RCB should be addressed on a timely basis, and capitalization of ‘going concern’ SDI strengthened. For other non-bank financial institutions, the authorities should continue to effect orderly exits of non-viable firms, while ensuring that viable institutions boost their financial buffers. The sharp increase in customer complaints underscores the importance of strengthening the framework for market conduct.
30. Completing ongoing reforms is critically important to strengthen financial sector oversight. Implementation of a robust Pillar 2 framework would help ensure that all banks maintain financial buffers that are commensurate with their risk profile, and possess adequate frameworks to manage the risks that they are exposed to. Similarly, implementing risk-based capital requirements for the insurance industry would help ensure that capital requirements adequately reflect institution-specific risks. Although continued focus on risk-based supervision, sound supervisory judgment and enforcement practices can help underpin supervisory effectiveness, reforms should coincide with further capacity building (including resource augmentation), stronger safeguards to ensure operational independence of supervisory agencies and more robust accountability frameworks.
31. More intrusive supervision is needed to foster effective board oversight and risk management. The clean-up has highlighted the importance of robust assessments of governance arrangements and risk management practices of financial institutions. Prudential standards and supervisory practices with regard to related party exposures would benefit from further review, given that such transactions have played a prominent role in some of the banking failures that materialized between 2017–2019. In particular, it is important to ensure that definitions are sufficiently broad; transparency of ultimate beneficiary owners of corporate entities is enhanced; and supervisory diagnostics are sufficiently thorough to detect close linkages between financial institutions and their counterparties. Intervention practices should also be reinforced to ensure that weaknesses are effectively remediated before they can cause lasting damage to institutions’ solidity.
32. The financial safety net can be further improved, drawing on experiences obtained during the clean-up. The overhaul of banking sector legislation, completed in 2016, proved invaluable for handling distressed institutions, but the clean-up process also highlighted scope for further improvements. These include (i) legal amendments that clarify resolution triggers, strengthen safeguards in line with international guidance19; and establish funding mechanisms for resolution purposes; (ii) the introduction of recovery planning requirements; (iii) enhancements of the new DPS to, among others, enable financial contributions on a least-cost basis to deposit transfers (which is a more efficient method of protecting depositors than reimbursement), strengthen backstop funding arrangements (e.g., via a credit line from the Ministry of Finance), and provide further guidance on the fund’s minimum target size; (iv) strengthen the BoG’s framework for the early detection of liquidity strains and the provision of liquidity support, in line with staff recommendations; and (v) full operationalization of BoG’s resolution office, duly segregated from its supervisory functions.
33. The Ghanaian authorities are well positioned to boost financial inclusion through implementation of the National Financial Inclusion and Development Strategy (NFIDS). Following a substantial improvement in financial inclusion during the past years, the authorities are now seeking to increase access to formal financial services to 85 percent by 2023, partly by leveraging financial technology to introduce new products and improve the delivery thereof. The comprehensive governance structure envisaged in the NFIDS—with a council comprised of senior government officials, a steering committee of department and unit heads of the various stakeholders and a coordinating secretariat, housed at the Ministry of Finance—should aid implementation of the 50+ actions envisaged in the NFDIS, but capacity building; mobilization of funding to support actions; and timely data gathering (to support progress monitoring) remain critically important. Publication of the strategy and periodic communications about achievements will help foster accountability.
Prepared by Constant Verkoren (MCM)
Foreign ownership is largely related to banking groups from Nigeria, the United Kingdom and South Africa. Note that two banks—the domestically-owned GHL Bank and First National Bank, a subsidiary of the South African FirstRand Group, are currently in the process of merging.
Ongoing recapitalizations of several locally-owned banks via Ghana Amalgamated Trust, a special purpose vehicle established by the Ministry of Finance in January 2018 to provide equity support to indigenous institutions, are expected to further increase government ownership in the banking sector.
Also see IMF Country Report No. 19/97, Box 3.
Also see World Bank, Enhancing Financial Inclusion, June 2019 (http://documents.worldbank.org/curated/en/395721560318628665/pdf/Fourth-Ghana-Economic-Update-Enhancing-Financial-Inclusion-Africa-Region.pdf).
Since December 2014, the ratio between risk weighted assets and total assets declined steadily from 70 percent to 57 percent.
GAT was established by the Ghanaian government in December 2018 as a vehicle that for mobilizing private sector funds to provide capital support to qualifying banks that successfully complete a due diligence process. Also see https://www.mofep.gov.gh/press-release.
The only minimum liquidity threshold that banks need to meet is the BoG’s cash reserve requirement, which (as of April 2019) stood at 8.34 percent.
Susu collectors are a traditional form of financial intermediaries that provide informal means for Ghanaians to save funds, in return for a commission.
https://www.bog.gov.gh/notice/notice-of-revocation-of-license-of-insolvent-microcredit-companies-and-appointment-of-receiver/ and https://www.bog.gov.gh/notice/notice-of-revocation-of-license-of-insolvent-microcredit-companies/.
Even abstracting from this individual firm, complaints received still more than doubled between 2017 and 2018.
More recent data is not publicly available, as the National Pensions Regulatory Authority has not published any annual reports since 2015. Similarly, SSNIT has not published financial statements and/or annual reports since 2016.
Also see presentation from the SEC on emerging issues in the fund management industry, http://sec.gov.gh/wp-content/uploads/Speeches-and-Presentations/SEC_Reforms_for_the_Fund_Management_Industry.pdf.
Financial Stability Board’s Key Attributes of Effective Resolution Regimes, published in October 2014, https://www.fsb.org/2014/10/key-attributes-of-effective-resolution-regimes-for-financial-institutions-2/.