Ghana’s banking chaos: a regulatory dilemma

Ghana’s central bank has taken over five banks and merged them into a single entity. It’s part of a process that began a year ago when the Bank of Ghana revoked the operating licences of two prominent local banks, Capital Bank and UT Bank. In this blog, I explain with Patrick Tettey Odetsi – a prominent financial analyst – why the sector needed reforming and if the crackdown will achieve its aims.


 

The general state of Ghana’s banking sector.

Ghana's banking sector has over the years grown into a somewhat vast but unwieldy industry. Along with many unregistered financial firms across the country, the regulated space has 144 rural banks, 423 forex bureaus and 484 micro-finance companies. There are also 43 non-banking financial institutions (operating in finance and leasing, mortgage finance, and savings and loans services), and various inward money transfer companies. At the top of the pile rests 31 commercial banks with branches across cities and towns in the country, along with 5 representative offices of major global financial institutions like Citibank and Exim Bank of Korea.

The prevailing banking landscape has emerged from a deep reform of banking regulations designed to stabilise a crisis ridden industry. The most fresh in memory is the turbulence of the mid-2000s with deterioration in the macroeconomic environment, which was compounded by the global financial crisis.

Regulatory controls were weak which exposed the sector to unscrupulous behaviour. Take the DKM Diamond Microfinance, for example. The micro-finance firm had for years diverted customers’ deposits, estimated at about GHS113 million (about USD 23.6 million) into its other subsidiaries in contravention of its operating licenses.

Following DKM's failure to honour several deposit withdrawal requests, distressed customers mounted several demonstrations, along with media reports of suicides. The Bank of Ghana offered to take inventory of DKM's assets and liquidate them to reimburse the customers, while the ruling New Patriotic Party promised during the 2016 general elections to compensate the victims.

These promises are yet to be fully met, but subsequent investigations by the central bank, which led to the closure of 70 microfinance firms, revealed such practices were more widespread. The implications of these events have been dire, not only for the banking and financial sector, but to the economy as a whole.

The banking misdemeanours exposed the Bank of Ghana to harsh criticism. Its failure to curtail what many considered as fraud perpetrated against less privileged customers became a heated political issue which further undermined public confidence in the banking sector.

The recent beefing up of banking regulations was designed to tighten the controls. Key provisions of the new regulations included an increase in the minimum capital requirement for commercial banks from 120 million to 400 million Ghana Cedis (about 83.6 million US Dollars). And a new Banks and Specialised Deposit-Taking Institutions law, which increased the central bank’s supervisory power, was introduced.

But there are now some serious concerns that the new regulations come with elements that will compound entry barriers for emerging and indigenous players. Mixed with the preponderance towards liquidation in the event of non-performance, this may have ominous consequences for financial inclusion.

What are the sector’s strengths and weaknesses?

Ghana’s booming banking sector propelled growth in real estate development and other services, like agro-processing and energy, in cities. But the impact on the economy and poverty through “financial inclusion” has been mixed.

Globally, development efforts now emphasise the need for financial inclusion. Goal 1 of the Sustainable Development Goals is to end poverty. It requires governments to ensure that all men and women, particularly the poor and vulnerable, have equal rights to economic resources. They should have access to basic services, ownership and control over resources and property, new technology and financial services.

Technology such as digital banking platforms, mobile money services and payment cards can make it possible for more people to earn a better living and keep their money safe.

Ghana has recorded some progress with financial inclusion. The latest report by the Global Findex Database shows that Ghanaian adults who have a formal financial service account increased from 29% of the population in 2011 to 58% in 2017. This is a big leap, but 58% is still low by global standards. And this growth has been led largely by telecommunications companies rather than the commercial banks.

It’s still very expensive in Ghana to have a bank account and to get credit. The country’s banks charge high lending rates, fees and commissions.

What’s the use of a banking system that’s so diffuse?

Many analysts have warned that the number of banks and other financial institutions does not match the size of Ghana’s economy, which stood at $47.8 billion in 2017.

The growth in the number of Ghana’s banking operations, coupled with the ever-increasing complexity of financial transactions, came at the expense of effective regulation and weaknesses in internal banking controls.

Sub-Saharan countries with bigger economies, such as Nigeria and South Africa, have fewer banks. Nigeria, with its GDP of $376 billion, has 22 commercial banks and South Africa has fewer than 20 banks with a GDPof 295.76 billion US Dollars. Nigeria has managed to stabilise its banking sector through a deep rationalisation process. While cutting back on the number of operators does not always guarantee success, especially in deepening and diversifying financial markets, it ensures that weaker and under-capitalised banks do not distort the competitiveness of the banking sector.

What should be done?

The Bank of Ghana seems to favour liquidation when dealing with ailing banks. But some believe it should be more flexible. It could take a tiered approach which sets different regulatory requirements for players at different levels.

To encourage investment in important but underfunded areas of the economy, such as agriculture and start-up businesses, some banks could be allowed to keep lower cash reserves. Ghana can look to Nigeria’s Small and Medium Industries Equity Investment Scheme for guidance.

Replacing quantity with quality banking services is the ideal. Running a banking sector with a vast number of players can be risky and expensive. Like the bailouts and stimulus packages that were doled out to banks after the 2008 financial crisis, the central bank’s intervention is a burden on the Ghanaian taxpayer. The government spent more than 8 billion Ghana cedis (USD 1.7 billion) as emergency liquidity assistance to the struggling banks whose licences were subsequently revoked. Ghana can’t afford this.

 

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