Financial sector reforms and developments, 1982-2000

Financial sector development during this period was shaped by the first financial reforms, dubbed FINSAP, which was carried out as part of the broad Economic Recovery Programme (ERP) and Structural Adjustment Programme (SAP) undertaken by the Government in collaboration with the IMF and the World Bank.

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The reforms, most of which were implemented during the late 1980s and the early 1990s, saw the abolition of the direct controls monetary policy regime. A new monetary policy regime of monetary targeting, where the Bank of Ghana uses indirect instruments as the primary instruments of monetary policy, was introduced (Bawumia, 2010). Interest rates were liberalised and floors and ceilings on lending and borrowing rates were abolished. The fixed exchange rate system was also replaced with a flexible exchange rate system with an interbank foreign exchange market established.

Reforms aimed at enhancing the soundness of the banking system through an improved regulatory and supervisory framework were undertaken, including the enactment of a new Banking Law 1989 (Act 227), a non-bank financial institutions (NBFI) Law 1993 (Act 328), the introduction of standardized reporting and accounting procedures, and the strengthening of the supervisory capacities of the Bank of Ghana (Brownbridge and Gockel, 1996). The new Banking law established minimum capital requirements for various classes of banks: commercial, development and merchant banks. Commercial banks focused on retail banking services provision for small and medium sized businesses; while merchant banks were to focus on corporate clients and providing corporate finance, syndications, and trade finance, with restrictions on branch banking. The development banks were the state-owned banks engaged in supporting specific sectors of the economy.

The state-owned banks were also restructured, with the removal of the huge non-performing loans (NPLs) from the banks’ balance sheet and their replacement with Bank of Ghana bonds. A specialized government agency, the Non-performing Assets Recovery Trust (NPART) was set up to take over the NPLs and recover as many of them as possible. This was to ensure sanity into the banking system. To improve on prudent lending practices, lending policies were overhauled and internal controls and risk management policies were either introduced or strengthened in the public sector banks.

As part of the reforms, under FINSAP, the banking sector also witnessed some changes in the composition and diversity of banks. Following relaxation of bank entry restrictions as part of the reforms, the industry witnessed the entry of four new private domestic banks, three foreign banks and two regional banks.14 No new state bank was established as two existing state banks merged.15 Furthermore, the regulatory environment and supervisory powers of the

14

The two regional banks were Ecobank Ghana whose parent company was based in Togo and Stanbic Bank, a subsidiary of Standard Bank of South Africa.

15

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Central bank were strengthened, and two insolvent state banks which could not meet capital adequacy ratios had their licenses withdrawn by the regulator. The two largest state banks were partially privatised with minority stakes floated on the Ghana Stock Exchange in 1995 and 1996. Following these developments during the 1990s, the structure of the banking sector at the end of FINSAP is captured in Table 2.5.

Table 2.5 Structure of Ghana’s banking sector, 2000

Bank Year of

Establishment

Ownership type Banking business

1. Standard Chartered Bank 1896 Foreign Commercial

2. Barclays Bank of Ghana 1917 Foreign Commercial

3. Ghana Commercial Bank 1957 State Commercial

4. National Investment Bank 1963 State Development

5.Agricultural Development Bank 1965 State Development

6. Merchant Bank Ghana 1972 State Merchant

7. SSB Bank 1977 Foreign Commercial

8. Ecobank Ghana 1990 Regional Merchant

9. CAL Merchant Bank 1990 Foreign Merchant

10. The Trust Bank 1994 Foreign Commercial

11. Metropolitan and Allied Bank 1995 Private domestic Commercial 12. First Atlantic Bank 1995 Private domestic Merchant 13.International Commercial Bank 1996 Foreign Commercial 14. Prudential Bank 1996 Private domestic Development

15. Unibank Ghana 1997 Private domestic Commercial

16. Stanbic bank 1999 Regional Commercial

Source: Bank of Ghana Reports (various issues)

In addition to the gradual reduction in the dominance of state banks, another notable feature of the above developments was the increase in the number of merchant banks from one to four. The merchant banks were to focus on investment banking services provision for large corporates, while the commercial banks had their line of business primarily in the retail banking segment. Merchant banks accordingly had branch restrictions as they could not have more than a branch in a major city. The development (mainly state) banks continued to operate to support the specific sectors for which they were established. In terms of banking business though, banks were primarily engaged in the provision of short-term loans and overdraft facilities, as well as investments in government securities and placements with other local banks. These served as the major components of the banking sector’s assets. These assets were funded largely by deposits which were mobilised in the local market.

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In terms of assets and liabilities composition, Table 2.6 shows that investment in government securities and placement with other banks accounted for 42% of total assets; while loans and advances represented 38% of the assets size in 2000. The major liabilities component is deposits which accounted for 62% of total assets. The banking sector operates at the short- term end with the maturity profile of government securities and loans being, on average, one year, while deposits maturities are, on average, three months. The major sources of deposits are individuals, firms and companies operating in Ghana, while the loan portfolio is similarly to retail and corporate clients operating in Ghana.

Table 2.6 Composition of Assets and Liabilities of Ghana's banking industry, 2000 GHC ‘000

Cash and Short-term Funds 82,934 7%

Investments in Treasury Bills and due from banks 512,560 42%

Loans and Advances 465,391 38%

Fixed and Other Assets 168,272 14%

Customer Deposits 760,407 62%

Borrowings and due to banks 60,700 5%

Shareholders’ Funds 131,237 11%

Other Liabilities 276,814 23%

Source:Computed by Author from Banks Annual Reports, 2000

Beyond the banking sector, the financial sector reforms also saw the development of a capital market, with the establishment of the Ghana Stock Exchange in 1990, stock brokerage firms, and the capital market regulator, the Securities and Exchange Commission. Other financial reforms in the non-banking sector were carried out in the insurance industry, savings and loans companies, and rural banks. Appendix 2.1 summarises the key reforms undertaken during FINSAP.

The gradual liberalisation of the banking sector resulted in a reduction in the level of concentration. However, the four largest banks remained unchanged with the two foreign banks, Standard Chartered Bank and Barclays Bank and the two state banks Ghana Commercial bank and SSB accounting for about 68% market share of total assets. In terms of

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the impact of these reforms on banking competition and efficiency, as discussed in detail in Chapters 3 and 4, Antwi-Asare and Addison (2000) observe that the reforms helped in expanding the size and diversity of the banking sector, and enhanced operational efficiency using various accounting ratio measurements. The authors note that although concentration levels declined, they still remained high and signalled that competition was low. A study by Buchs and Mathisen (2005) based on data for the period 1998–2002 finds that the banking industry still exhibited an uncompetitive market structure and that the high domestic financing requirements of the government fostered inefficiency in the banking industry. Banking concentration remained high in spite of the fall in concentration levels, and this was seen as fostering anti-competitive behaviour by the big banks. The huge mandatory reserve requirements to accommodate government fiscal deficits and low penetration of new banks were also seen as factors which constrained banking competition and efficiency. Thus, although FINSAP created an improved environment for the banking sector, it was seen as making only a limited impact on enhancing the competitiveness and efficiency of the industry due to those lingering challenges.