Ghana’s banking industry has undergone a challenging period in recent years, weathering an economic downturn and a rising tide of non-performing loans (NPLs). While delinquent debts have undermined sector stability and remain a key challenge, the country’s lenders continue to grow their assets and remain profitable. With a wholesale regulatory reform of the sector well under way, the prospects of continued expansion by a strengthened and revitalised sector are good.
Prior to the formation of modern Ghana, the banking industry of what was then British West Africa was entirely comprised of foreign institutions. The first to be established in the Gold Coast, part of the territory that would later become Ghana, was the Bank of British West Africa (BBWA). The BBWA was backed by the South Africa-based and London-run African Banking Corporation, and opened its doors for business in 1894. In 1918 the BBWA was joined by the Colonial Bank, which in 1925 merged with the Anglo-Egyptian Bank, the National Bank of South Africa and Barclays Bank to form Barclays Bank (Dominion Colonial and Overseas).
From the late 1920s until the early 1950s these two foreign institutions were the only providers of banking services in the Gold Coast, opening branches in a large number of provincial capital towns and coastal trading centres across the territory. In 1953, with independence approaching, the Bank of the Gold Coast was established. After Ghana gained its independence in 1957, the Bank of the Gold Coast was divided into two entities: the Bank of Ghana (BoG), which was later developed into a fully fledged central bank; and the Ghana Commercial Bank, which soon emerged as the largest commercial lender in the country.
Over the following decade a number of new banks entered the market, including state-owned National Investment Bank, Agricultural Development Bank, Merchant Bank and the Social Security Bank. The socialist economic policies of this period made the environment a challenging one for private banks, but a shift to market economics in the 1980s and the promulgation of a new Banking Law in 1989 led to a number of new players, including Meridien BIAO Trust Bank; CAL Merchant Bank; Metropolitan and Allied Bank; and Ecobank. The financial sector was further liberalised in the 1990s when the government sold off a number of its flagship banking interests, including Ghana Commercial Bank, which rebranded as GCB Bank (GCB) in 2013, and the Social Security Bank – a development which paved the way for the formulation of the modern banking industry.
As of January 2019 the BoG had licensed 23 banks to operate in the country. There were also four representative offices of foreign banks present: Citibank Ghana, Ghana International Bank, Exim Bank of Korea and Bank of Beirut. The market is top-heavy in terms of assets, and this phenomenon has become increasingly pronounced in recent years: the top quartile of the domestic banking sector accounted for approximately 56% of the industry’s total operating assets at the end of 2017, according to professional services firm PwC, representing an increase of 49.5% from 2016.
The domestic banking industry is also characterised by a high degree of asset fluidity, with players moving up and down the asset rankings from year to year. Locally owned GCB nudged Togo-headquartered Ecobank from the top spot in 2017, after showing a 45.5% growth in total operating assets – largely attributable to its acquisition of selected assets from two failing banks. At the close of that year GCB held approximately GHS8.27bn ($1.79bn) in operating assets, compared to Ecobank’s GHS8.15bn ($1.76bn).
The third spot in terms of assets was taken by Barclays Bank, which held GHS5.7bn ($1.2bn). The bank operates in the country as part of Absa Group, a Johannesburg-listed entity, which is one of Africa’s largest financial services groups. Fidelity Bank came in fourth, with GHS5.1bn ($1.1bn) in assets. The locally owned bank is a relative newcomer, having obtained its licence in 2006. Fidelity Bank expanded its operating assets significantly during 2017 through active deposit mobilisation, which resulted in an estimated 22.8% expansion of its deposit base.
Fifth place in the asset rankings was secured by Stanbic Bank Ghana (Stanbic), with GHS4.8bn ($1bn). Stanbic is a division of Standard Bank, a member of the Johannesburg-headquartered Standard Bank Group, and has been operating in Ghana for more than a decade. Standard Chartered Bank, in sixth place with GHS4.4bn ($950.8m) in operating assets, is the country’s oldest bank, having operated in the territory which constitutes modern Ghana for more than 120 years. Zenith Bank in seventh place, with GHS4.3bn ($929.2m), rounds out the upper quartile of the sector, having entered it for the first time in 2017 and displaying rapid deposit growth.
At the other end of the lending spectrum, Ghana’s banks also compete with a vibrant microfinance subsector, organised into three tiers by the BoG. Tier 1 is made up of 144 rural and community banks, which began to enter the market in the 1970s. These locally owned and managed institutions provide credit to small-scale farmers and businesses within a limited geographic area, and are supervised by the clearing entity ARB Apex Bank, under the BoG. Tier-2 activities include the traditional Susu companies, which collect savings and are able to extend small amounts of credit in the form of microfinance loans. As of July 2018 there were an estimated 484 microfinance institutions (MFIs) operating in the country, according to the BoG. The subsector also contains 12 financial non-governmental organisations (FNGOs) that take deposits and turn a profit.
Tier 3 is made up of 70 money lenders or microcredit organisations, which cannot accept deposits, as well as non-deposit-accepting FNGOs. Capital requirements and regulatory responsibility varies across the tiers, with Tier-1 companies facing the most stringent rules and are subject to the same Banking Act that the commercial banks face.
The rapid emergence of MFIs has posed an increasing challenge to larger, traditional financial institutions that are looking to break into the small-ticket retail segment. “Microfinance is a big challenge. Half of the population is unbanked, and many prefer to go to MFIs because they are quicker to approve loans and their requirements are lower – even though they charge high rates of interest,” Robert Quansah, head of strategy at Bank of Africa Ghana, told OBG.
In recent years the banking and microfinance industries have shown certain signs of financial instability that have become a matter of some concern to the regulator. In 2017 the BoG was compelled to revoke the licences of two lenders – Capital Bank and UT Bank – due to insolvency, and place their operations under the control of GCB.
Although depositors’ funds were protected by the regulator, the development still constituted a blow to overall consumer confidence. “We are dealing with a loss of confidence in the wider financial services sector,” Nii Amankra K Tetteh, managing director of Bayport Financial Services, told OBG. “Nonetheless, we expect that increased capital requirements and a stricter regulatory environment in 2019 will help alleviate this. Hopefully the extra capital will grow the formal investment space.”
In August 2018 trust in the system was further eroded when the licences of five additional banks were revoked and their businesses merged into one limited company – Consolidated Bank Ghana. Two of these institutions – Construction Bank and GHL Bank – had only entered the market in 2017. In December of that year the BoG announced a freeze on licensing banks and other financial institutions while it focused on increasing sector stability. At the end of 2018 two further banks were subsumed within Consolidated Bank, bringing the total to seven.
The actions of the regulator are a response to systemic weaknesses in the financial industry, which the BoG traces back to liberalisation in the early 2000s, a period in which it was attempting to increase competition and innovation. The banks that entered the market at this time were soon faced with a deteriorating economic environment, characterised by large fiscal and current account deficits, a volatile exchange rate, low GDP growth and high inflation, and the fallout from the acute energy sector debt crisis.
The period was also marked by a widespread disregard for corporate governance standards in addition to lax financial sector supervision and regulation. The result of this was a build-up of NPLs in the system, combined with an overall deterioration in the balance sheets of banks and MFIs. An Asset Quality Review conducted by the BoG in 2016 showed a trend of significant decline in asset quality among banks, which had the effect of constricting the supply of credit to the private sector and increasing the cost of loans.
The microfinance industry, meanwhile, has been even more seriously affected: of the more than 500 licensed MFIs in 2018, approximately 211 have either become non-operational or been defined by the regulator as distressed. The BoG estimates that GHS740.5m ($160m) is owed to more than 700,000 depositors by these companies, a figure that represents more than half of all deposits held by the MFI subsector, creating a situation which is negatively affecting the image of the financial services industry.
Given these developments, boosting the stability of the financial industry is a strategic priority for the BoG. The regulator governed the sector according to the Banking Act 2004 until recently but, in response to the instability, it has overhauled the regulatory framework. The most notable result of this effort is the Banks and Specialised Deposit-Taking Institutions Act 2016, which replaced the 2004 legislation as the primary statute by which the financial sector is supervised.
The new act is somewhat broader in scope than the law it replaced and grants the BoG much more supervisory power. Significantly, the 2016 act brings all deposit-taking entities – including some non-banking financial institutions – under one law. It also establishes more stringent criteria for licensing, mergers and changes in controls, and allows the regulator to supervise banking groups and financial holding companies in a more consolidated manner.
The BoG has also sought to shore up the deposit base of the financial industry via the Ghana Deposit Protection Act, which also passed in 2016 and was scheduled for implementation in 2018. The act enables the BoG to charge banks and deposit-taking institutions a modest premium in order to guarantee the funds of small depositors up to a value of GHS6250 ($1350). As of the beginning of 2019 the act had yet to be fully implemented, with local officials saying in February 2018 that they were working to make it operational by the following April.
Other regulatory responses undertaken during 2018 to combat perceived sector vulnerabilities included the “Fit and Proper” Directive on corporate governance, which will be applied to directors, other key personnel and major shareholders, as well as a mergers and acquisition directive aimed at reducing risk associated with sector consolidation.
The most challenging regulatory response to the sector’s instability, however, is the change to the amount of capital banks are required to maintain in order to retain their licences. Banks were given until December 2018 to meet a new minimum capital requirement of GHS400m ($86.4m), which replaces the previous level of GHS120m ($25.9m). While the effects of the change have yet to be fully felt, it has the potential to significantly alter the structure of the industry. The experience of Nigeria more than a decade ago, when it raised its minimum capital requirement from N2bn ($6.5m) to N25bn ($80.8m), suggests that smaller banks in Ghana will either leave the market or be acquired by larger players. Those that emerge from the process will be better capitalised and more capable of financing larger projects and investments, which will have a beneficial effect on the wider economy. “Recapitalisation rates, as directed by the BoG, will be a positive change in the banking sector,” Ifeanyi Njoku, managing director of local lender Access Bank, told OBG. “Banks need the capacity to deal with large corporate customers, and at this time very few have the scale to handle such accounts.”
Lenders in Ghana that are seeking to bolster their capital base have several options open to them. For larger players, capitalisation of reserves may offer the most straightforward route to regulatory compliance. Mergers, while desirable from the viewpoint of sector stability, are made challenging by a relatively undeveloped mergers and acquisitions legislative framework, as well as the reluctance of banking families to cede control of their businesses. Adding capital, meanwhile, allows for the retention of control, but is a costly proposition with high interest rates in the country.
Securing a strategic investor, therefore, is the preferred option of many lenders. This is especially the case where a bank has targeted a particular economic segment, such as small and medium-sized enterprises, and does not wish to diffuse this focus by teaming up with a less discriminating lender.
In 2018 it was reported in the international press that the BoG was in the process of facilitating talks between potential investors and banks that were seeking capital injections. The roster of interested parties included a wide range of institutions, from domestic pension funds to global private-equity players. The relatively short adjustment period also prompted some lenders to request more time to secure the necessary equity, which was not granted.
In January 2019 the BoG issued a press release stating that the number of banks in operation had been reduced from 31 to 23. It said that 16 of the banks had met the capital requirement by injecting fresh capital and capitalising surplus income; eight banks had merged to create three new banks; and the remainder had received equity from private pension funds through special purpose holding company Ghana Amalgamated Trust.
Despite the sector’s deteriorating stability, lenders have exhibited steady growth in operating assets in recent years. Total assets grew by 19.6% between October 2017 and October 2018 to GHS106.3bn ($23bn), continuing a trend of successive year-on-year (y-o-y) growth since at least 2013, when assets stood at GHS34.2bn ($7.4bn).
However, most of this expansion has been driven by deposits, while credit growth has exhibited a more irregular pattern. During Ghana’s most recent phase of economic expansion, the nation’s banks succeeded in growing their loan books considerably; aggregate lending almost doubled in 2014 and 2015 to an estimated GHS30bn ($6.5bn), according to the BoG. However, the economic slowdown that began in 2016 reduced lending activity and, in turn, negatively affected banks’ income. According to international ratings agency Moody’s, interest income from loans and advances declined to 45% of total revenue by October 2017, from around 50.4% in October 2016.
The economic downturn also worsened the sector’s exposure to NPLs, as weak private sector growth and delayed payments for government projects had the effect of making it difficult for some borrowers to honour their scheduled repayment dates. BoG data shows that NPLs in the system increased to 21.6% of total lending in December 2017, and only declined marginally to 20.1% in October 2018.
Such a high level of NPLs – well above the global average of around 7% – is not only a threat to profitability, but also to the capacity of banks to perform their proper function as growth drivers in the wider economy. While there has been an improvement in key macroeconomic indicators – including a falling rate of inflation, lower rates on Treasury bills and a decline in the BoG’s key policy rate – the weight of NPLs on banks’ balance sheets means that they have not been able to pass on these benefits to consumers in the form of cheaper lending rates.
In March 2018 President Nana Akufo-Addo issued a statement that said the average bank lending rate of 30% was constricting growth in the private sector. To help remedy the situation, in May 2018 the government tapped the international sovereign markets, raising $2bn through the sale of two eurobonds with 10- and 30-year maturities. “The impact of these bonds is yet to be felt in full, but liquidity is beginning to return to the economy and interest rates are edging lower,” Henry Oroh, CEO of Zenith Bank, told OBG.
In terms of profitability, Ghana’s banks have put in a strong performance, even in the face of diminishing lending activity. According to the BoG, the sector reported profits of GHS1.95bn ($421.4m) in the January to October 2018 period – a 22.3% y-o-y increase.
Ghana’s large unbanked population represents a considerable opportunity for lenders as they seek to diversify their revenue streams. According to the World Bank’s most recent data on the subject, only 40% of the country’s adults possessed a bank account in 2014, while less than 20% had a formal savings account.
Emerging technologies are making it easier for banks to connect with the mostly rural population that lies outside the formal banking system. The mobile money programmes spearheaded by the telecoms sector, in particular, offer banks new channels to reach and expand their customer base.
Digital banking has emerged as the most dynamic segment of the financial market in Ghana in recent years. According to the BoG, the volume of deposits and withdrawals made via mobile devices rose to GHS882m ($190.6m) in 2017 – a substantial increase of 78% over the previous year. MFIs are also helping to drive this trend.
The digital revolution that is currently sweeping through the global banking sector clearly offers potential gains to Ghana’s banks, particularly those wishing to move away from their traditional reliance on corporate lending. However, with telecoms operators, lending institutions and emerging financial technologies all vying for ownership of this segment, the growth of mobile financial services also presents a strategic challenge (see analysis).
Stronger economic growth and increased stability among lenders is expected to boost sector performance in 2019. Most ratings agencies anticipate a return to loan growth and rising fee incomes as confidence returns to the industry after its recapitalisation. The average return on assets is also predicted to rise, with some estimates placing it at 4% in 2019, up from 3.3% in October 2018.
On the regulatory front, the BoG has indicated that it intends to introduce further stability-boosting measures over the short term. These include the continued implementation of the Basel II and III supervisory framework and complete implementation of International Financial Reporting Standard 9; tackling the high levels of NPLs and low levels of corporate governance; and strengthening the capacity and resources of the BoG’s Banking Supervision Department to ensure full adherence to new rules and regulations as they are introduced.
The question of capital is also likely to remain a salient one in 2019. As part of the Basel II and III implementation process, in January 2018 the central bank issued its Capital Requirements Directive (CRD), which will serve as a new reporting framework. Once the provisions of the CRD have been fully implemented, institutions will be expected to align the level of risk that they carry with the amount of capital they hold. This risk-based approach represents a regulatory advancement on the simple minimum capital requirement, and it will help to bring Ghana’s banking sector more into line with international best practices.