Millison Narh: Ghana's financial services industry and its impact on
private sector growth
Keynote address by Mr Millison Narh, First Deputy Governor of the Bank of Ghana, at the
Ghana Association of Bankers - 13th Annual Working Luncheon, Accra, 8 August 2013.
* * *
Mr. Chairman, the Executive Secretary, Members of the General Council, Managing
Directors of Banks, Fellows and Associates of the Association of Bankers, Members of the
Banking Fraternity, Distinguished Guests, Ladies and Gentlemen:
1. Good afternoon and welcome to the 13th Annual working luncheon of the Ghana
Association of Bankers. I am privileged to be given the opportunity to address stakeholders
of the banking sector today. The Association gave me the liberty to decide on any topic and
since this gathering consists of members of the banking fraternity, I have chosen to focus on
the financial services industry and its impact on private sector growth, with emphasis on
financing small and medium term enterprises. But first, let me start with the current global
and domestic economic conditions through which we can leverage our way, as financial
intermediaries to promote growth and development.
2. Mr. Chairman, we are holding this annual luncheon against the backdrop of
continued global uncertainties characterised by financial and sovereign debt crisis in the euro
area and weakened global growth prospects across major advanced economies. The
prevailing weak global economic conditions have dampened external trade and weakened
commodity prices on international markets. In the first half year of 2013, we have seen some
signs of growth though unevenly spread across regions. In the euro area, the recession
continued and in the US, the recovery remained timid while Japan offered some positive
signs of growth. In emerging markets especially China, the tempo of economic activity has
reduced somewhat, posing further threats to overall global growth prospects.
3. In the quarters ahead, however, global growth is projected to pick up gradually while
an upturn in world trade and financing conditions may also boost growth in the euro area.
These notwithstanding, the impact of the current weak global conditions have resulted in
sharp drop in commodity prices, especially gold, with adverse implications for the country's
external sector. Mr. Chairman, let me now shift focus to developments in the Ghanaian
economy over the first half year.
4. The Ghanaian economy experienced phenomenal growth over the last two years,
spurred on by the oil sector and its multiplier effects on economic activity. Economic growth
peaked at 15 pct in 2011 and 8 pct in 2012 with inflation firmly anchored in single digits for
the two consecutive years. However, assessment of current economic conditions in the first
half of 2013 indicates some growth moderation amid rising inflation.
5. Economic conditions broadly remained challenging during the first half of 2013. The
developments reflected a slower pace of real sector economic activity during Q1 evidenced
by a contraction in the real CIEA and weak business and consumer sentiments in the
quarter. However, economic activity and consumer confidence rebounded in Q2 while
business confidence continued to be weak.
6. Headline inflation has consistently trended upwards in the year on account of
significant increases in domestic petroleum products and seasonal food cycle which affects
prices. Inflation has risen to 11.8 pct in July 2013 (new CPI basket), from 8.8 pct in
December 2012. In addition, inflation expectations by both businesses and consumers
remained heightened.
7. On the external front, prices of Ghana's key commodities softened which resulted in
lower export earnings. This, coupled with moderated import growth, resulted in some
improvement in the trade deficit to US$1.2 billion in the first half, compared with a deficit of
US$1.3 billion same period last year.
8. While modest gains have been made in broadly stabilizing the foreign exchange
market, major vulnerabilities emanating from continuing imbalance in the supply and demand
conditions on the market are currently exerting some pressure on the local currency. On a
year to date basis, the Ghana cedi has cumulatively depreciated by 3.4 pct against the US
dollar, compared to 17.2 pct depreciation a year earlier. Going forward, the Bank of Ghana
stands ready to implement both short term and medium to long term measures to ensure
stability in the foreign exchange market.
9. Mr. Chairman, as we all know, developments in the banking sector showed that
banks remained profitable, liquid and well-capitalised, thanks largely to the high interest rate
environment that has persisted for some time now. In contrast to low investment yields of
2 pct in global financial markets, banks in Ghana on average had ROE of over 20 percent
and ROAs of over 5 percent. The Capital Adequacy Ratio (CAR) was about 18 pct, above
the prudential limit of 10 pct. Asset penetration, measured as the ratio of total assets to GDP,
was 40.5 pct indicating continued deepening of the financial sector in the economy.
10. These notwithstanding, there are some concerns to us at the Bank of Ghana like the
persistently high level of NPL ratios compared to other peer countries. As at June 2013, the
NPL ratio was 12.8, down from 13.2 in June 2012. Although the rates are on the downward
trend, they are still high and we are taking steps to encourage banks to write-off long
outstanding "loss" accounts with 100% provisioning that tend to overstate the true NPL level.
For instance, when we account for the loss category, the NPL ratio as at June 2013, declined
to 4.7 which compares favourably with prevailing NPL levels in other peer countries.
11. On the other hand, there is also the need to apply strict provisioning rules on
overdraft facilities which are more prone to "ever-greening" than ordinary term loans. Other
issues are: the build-up of unclaimed deposit balances or dormant accounts on banks'
books; concentration risk on both sides of the balance sheet - large loan exposures and
reliance on large deposits; the need for transparent regulatory issuances on such issues as
Mergers & Acquisitions, internal controls, and external auditors; and finally the need to
update manual of accounts and reposting requirements.
12. The Bank of Ghana took another major step to enhance transparency in the setting
of lending rates in the industry. The new base rate model which seeks to ensure
transparency and uniformity in loan pricing within the banking industry, became operational
in July 2013. As per the directive, banks have fully complied with the new framework and
there are positive indications that on the average, base rates have declined by about 3 pct in
the banking industry. This new initiative, together with the credit bureau system and the
collateral registry should help improve the environment for lending and further help lower
NPLs in the banking industry.
13. Mr. Chairman, permit me to touch on a matter that is sensitive to both the industry
players and the Bank of Ghana that is capital requirements. Developments in the
macroeconomic front have necessitated the need for the Bank of Ghana to review the minimum
capital requirements for new industry entrants. In this regard, the minimum paid-capital for
major banks have been revised from GH¢60 million to GH¢120.0 million while that of NBFIs
increases from GH¢7.0 million to GH¢15.0 million. That of the rural banks have been upped
to GH¢300,000.
14. These increases are necessary in order to provide our institutions with the muscle to
undertake big-ticket deals to support the growth of the private sector and to further serve as
a capital cushion for absorbing unexpected losses that may arise in the normal course of
business. In this regard, I would like to take this opportunity to advise the industry players,
particularly the banks, to properly align their risk appetite to their capital levels. This is
important because any misalignment between risk and capital could threaten the solvency of
the institution and unduly put shareholders investments at risk. Mr. Chairman, subsequent to
these capital enhancements, we have initiated action towards gazetting the increases as
required by law.
15. Mr. Chairman, to equip our tool box with the necessary tools needed to identify and
manage problem banks, the Bank of Ghana has developed a Supervisory Intervention Guide
which seeks to provide a consistent and transparent framework for intervening in the
operations of regulated deposit-taking Financial Institutions with the view to protecting the
interest of depositors and shareholders.
16. In order to further strengthen the regulatory and supervisory regime, we have also
developed guidelines and regulations which are being fine-tuned for the consideration of the
sector minister and Parliamentary approval where necessary. These include;
•
Corporate Governance Regulations
•
Licensing Regulations
•
Outsourcing Guidelines
•
Risk Management Guidelines
•
External Auditors Regulations
•
Mergers and Acquisition Guidelines
17. Of these, the Outsourcing Guidelines and the Corporate Governance Regulations
have already been exposed to industry and we have received contributions and some
interesting comments from the banks. It is evident that without a strong Corporate
Governance regime, shareholder's investments will be put at risks and the industry as a
whole would be less attractive to investors.
18. Mr. Chairman, to further strengthen our supervisory function, the Bank of Ghana has
also initiated action toward the revision and consolidation of the existing laws that govern the
Banking and Non-Bank Financial Institutions. It is envisaged that these initiatives would
remove any potential vulnerabilities in the banking landscape to ensure a safe and sound
banking practices across the industry.
19. Another recent industry development is BOG's quest to introduce a Deposit
Insurance Scheme in Ghana. Pursuant to this objective, a feasibility study has been done by
Global Business Solutions of Germany, financed by KFW of Germany. The study has since
been approved by the Bank of Ghana, KFW and the Government of Ghana (GOG) through
the Ministry of Finance. Currently the Bank of Ghana and the Ministry of Finance have
reviewed and approved the Terms of Reference for the Legal consultants to draft a Deposit
Insurance law for industry. It is our expectation that the Deposit Insurance Agency would
become operational by end December 2014 and that could afford some protection to all
depositors.
20. The key challenge going forward to the banking industry is how to maintain the
continued high levels of profitability over the medium to longer-term and more particularly,
when the interest rate environment begins to shift its course. It appears to us at the Bank of
Ghana that, among many other avenues for maintaining the bottom line like massive cost
cutting and growing non-fee-based income, the answer could lie in taking up the SME
challenge - which in the words of a recent banking survey means harnessing the SME
potential.
21. Although the banking sector has not witnessed new entrants this year, the number
of microfinance institutions licensed by the Bank of Ghana has more than doubled to 228 by
June 2013, from 90 in December 2012. The increasing trend in acquisition of licenses by
microfinance institutions signals the increasing demand by economic agents at the lower
echelon of financial service provision.
22. Traditionally, banks are known to focus largely on corporate as well as personal and
consumer banking. Thus, the increasing number of microfinance institutions suggests a
broadening of the scope of financial service provision at the micro level. This leaves a wide
financial services gap, which has been referred to as the "missing middle" and constitutes
mainly Small and Medium Enterprises (SMEs).
23. Mr. Chairman, the critical role that this segment of society plays in any economy
cannot be overemphasised. Various studies show that promoting the development of SMEs
can be used as a catalyst for economic growth, employment and poverty reduction. And yet,
by their nature, SMEs are constrained from accessing financial services, especially through
the major banks due to lack of proper governance, weak management systems, technical
knowledge, and poor labour skills. Although most banks are aware of the potentials of SMEs,
venturing into the sector requires painstaking efforts to help them overcome these
constraints. Nevertheless, SME financing can be a good business for banks and a better
understanding of the sector should provide enough incentives for banks to start and build
business relationships with them. This is an investment that can be done now within the
environment of high bank profitability.
24. To start with, it is important for banks to understand the mode of operation of SMEs
and develop innovative financial services that suit those peculiar needs. Typically, SMEs
have weak competencies in financial management and they operate with low levels of
productive capital which heightens their risk levels. With such background knowledge, banks
should seek to set up specialised desks to provide strong guidance for SMEs to address
weaknesses in their financial management, handle SMEs appraisals, loan documentation
and monitoring. These processes could set very high standards for SMEs financing and help
lower risks associated with the financing sector.
25. While it is essential for banks to embrace SME financing, it is even more critical not
to downplay the risks associated with the sector. This brings up the issue of risk
management systems and structures to assist in the identification and effective management
of risks in the banking environment, including that of SME banking businesses.
26. The need to invest in risk management structures, policies and procedures including
IT systems that go beyond the traditional lending activities of the bank to include SMEs
should therefore be factored in as banks engage in their own internal capital adequacy
assessment program. Some profits could be retained to support such SME-friendly
capacitybuilding initiatives in addition to funding internal growth to meet the demands for large
financing by our fast-growing oil economy. In addition, the practice of placing some funds
with banks abroad beyond usual need to fund correspondent banking relationship should be
rationalized by banks heavily engaged in this practice.
27. We are also closely monitoring the fast growing share of deposit - taking non-bank
financial institutions (NBFIs) sector such as savings and loans companies and finance
houses in the total assets of the financial system. The strong growth of these other
institutions has reduced the banks share in total assets from 89 pct in 2010 down to 85 pct.
These smaller institutions which are able to offer more competitive rates on deposit products
to their customers are inching up their market share. Clearly, this development should be a
wakeup call to all banks since there are more funds that can be intermediated in the
economy if the price is right.
28. In conclusion, let me reiterate that financial intermediation, especially for SMEs, is
critical for overall private sector development and growth acceleration. However, it is
important to create the necessary macroeconomic environment for an effective and efficient
financial sector to jumpstart the process. Looking ahead, the central bank is optimistic that
inflation will edge closer within the target band by end year as inflationary pressures decline
in the quarters ahead. The Bank also stands ready to implement sound monetary policies
and take appropriate measures aimed at consolidating macroeconomic stability.
29. Thank you for the attention.