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Ghana’s banking reform is only halfway there

Nana Adu Ampofo
By Nana Adu Ampofo
Co-Managing Partner, Songhai Advisory

Songhai Advisory delivers local knowledge to Africa investment decision-makers aiming at sustainable and transformative outcomes. For more information visit

Posted on Friday, 5 July 2019 12:31

The headquarters of Ghana's central bank, also known as the Bank of Ghana, in Accra, Ghana. Nicholas Seun Adatsi/Bloomberg

Lingering problems such as poor governance, insolvency and liquidity failings indicate that banking reforms in Ghana have only scratched the surface.

Between August 2017 and June 2019, Ghanaian authorities undertook a financial sector “sanitisation” exercise that significantly reduced the number of banks operating in the country.

Government’s detractors, however, accuse it of wielding executive authority as a partisan stick with which to beat its opponents. Both points of view may hold true. There is no doubt that poor governance, insolvency, and liquidity failings underpinning the licence revocations were real. It is equally true that those banks most closely associated with the opposition were given the least leeway in the cleanup.

The real concern now should be whether the reforms addressed the serious problems surrounding financial intermediation in Ghana.

Where we stand

The banking sector sanitisation began in 2017. Then, according to the World Bank, domestic credit as a proportion of GDP averaged 21% for low-income countries, 44% for lower-middle income countries, 47% for Sub-Saharan Africa, and 99% for middle-income countries.

In Ghana, which achieved lower-middle income status in 2010, the equivalent figure was only 14% – less than a third of the Sub-Saharan African average.

Worse still, in 2017, non-performing loans (NPLs) were 22% of gross loans in Ghana. Again, this was well in excess of regional comparisons, such as Nigeria (15%) and Kenya (10%).

Industry participants complained that indigenous banks were unable to participate in large transactions, such as the Tema port expansion, and were reluctant to support small and medium-sized enterprises (SMEs). They claim that large projects are structured and financed by foreign-owned commercial banks and bilateral and multilateral development finance institutions.

Instead, the banks focused on government debt and large corporates. Local entrepreneurs with the inclination, necessary collateral, and a business plan, had to resort to microfinance institutions where a 60% interest rate is not uncommon.

Clearly, something was, and is, profoundly wrong with the financial system in Ghana. This may be due to:

  • Poor governance and decision-making. Autocratic chief executives, ill-informed or over-influential board members contributing to political party-related lending (including, it is alleged, to “friends, family and girlfriends too”), impotent risk and credit committees, and profligacy and mission creep at the failed banks.
  • Weak oversight. Ghana is strong on regulation and lawmaking, but weak on enforcement. The Bank of Ghana made frequent checks on licensed banks and their apparent infractions but did not act early enough to prevent the 2017-19 exercise.
  • Specific sectorial failings. By the end of 2018, electricity, water, and gas utilities and the agriculture sector received less than 15% of total credit from the banks but accounted for 27% of non-performing loans. Furthermore, 36% of loans to agriculture and 38% to the state-owned enterprise (SOE) utilities were impaired due to weak agricultural sector productivity in the former and financial delinquency in the latter.
  • Financial muscle. There is a natural expectation that banks with deeper pockets will be better placed to finance larger projects.

The clean-up exercise addressed these issues, but imperfectly. It included a 333% increase in minimum capital requirements, which currently stand at $74m. It also demanded additional changes, including improved banking corporate governance and stricter merger and acquisition (M&A) directives.

The new measures rapidly reduced the number of licensed universal banks from 34 to 23 (bank branches across the country, as a result, have fallen from 1,546 to 1,225). It also culled the microfinance companies – down from 484 to 137 – and microcredit companies – from 70 to 31. As a result, the capital adequacy ratio (CAR) of the banks has risen from 17.4% to 21.7%. (By comparison, ten years ago it was 14.3%. It seems that the bank closures, even with political colouring, has dramatically improved decision making incentives.

Total banking sector assets increased from GHS93.6bn ($17.3bn) in 2017 to GHS109.9bn at end-April 2019. However, taking into account currency depreciation, this is only $21.2bn in both years. In other words, overall the financial muscle of the banking sector is little improved.

The government also created a special purpose vehicle and a new government agency to refinance impaired loans and oversee the financial management of the energy sector SOEs. Management of the Electricity Company of Ghana (ECG), the country’s main power distributor, has been delegated to a private consortium, which is pushing out improved – if politically expensive – technology, such as prepaid meters.

While such measures are laudable, they neither ensure cost recovery tariffs nor do they take the brave new step of incorporating a subsidy for energy consumption. By failing to take one path or the other, finances will remain insipid, volatile, and below potential.

Bottom line:

  • Ghana goes to the polls in 2020. The opposition National Democratic Congress (NDC) has pledged that it will return assets improperly seized during the reign of the New Patriotic Party (NPP) to their rightful owners. Crucially, however, that plans depends on the courts determining whether the central bank acted improperly.
  • Cost recovery prices. The Public Utilities Regulatory Commission (PURC) introduced an 11.2% increase in energy tariffs on 1 July and prices could be amended again based on the automatic adjustment formula or another major revision in 2020. More substantial reform, particularly before the 2020 general elections, looks unlikely.
  • Agricultural productivity interventions. Historically, public investment in the sector has been low. Subsidised inputs – under the government’s planting for food and jobs strategy – could support productivity and the viability of related businesses in the short-to-medium term. However, it undermines the commercial provision of the same and could again be interrupted by the political cycle.
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