Paul A Acquah: Evaluating the banking system in Ghana
Keynote address by Dr Paul A Acquah, Governor of the Bank of Ghana, at the Fifth Banking Awards
Ceremony, Accra, 6 May 2006.
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Mr. Chairman,
Honourable Ministers of State,
Executives of Corporate Initiative Ghana,
Captains of Industry,
Distinguished Guests,
Ladies and Gentlemen,
1. Thank you very much for the invitation to be the Guest of Honour and Keynote Speaker for this
edition of the Ghana Banking Awards event. My understanding is that this is the fifth in the series of
banking awards and judging by the array of personalities assembled, it would be right to say that this
event has come of age and would remain an expected event on the annual corporate calendar.
2. Mr. Chairman, today's event is truly important and very much welcome. First of all it is purely a
private sector initiative, largely driven by consumers of the products and services of the banking
industry, and designed not only to recognize excellent banking service delivery but also to foster
competition among banking service providers. Secondly, I know that this event has over the years
urged banks on to invest in their capacity to deliver superior services either to keep their leadership
position(s) or to attain such leadership in the various areas. Thirdly, the event can be seen as a forum
where market participants, the consumers of banking services, cast their votes openly with regard to
their perceptions and assessments of the quality of the services they receive from individual
component banks that constitute the financial system. This type of consumer assessment is of special
interest also to the central bank, as the regulator responsible for maintaining the stability and
soundness of the industry, and confidence in the financial system as a whole.
3. The public has a legitimate and fundamental interest in an efficient, sound, liquid and
wellfunctioning banking system, that is well-regulated within a stable macroeconomic environment. A
banking system that is effective in mobilizing resources and channeling them into productive
investments and in support of growth.
4. Mr. Chairman, as with most developing countries that have pursued economic and structural
reforms, Ghana has been undergoing a process of financial sector restructuring and transformation as
an integral part of a comprehensive strategy for some time.
It is fair to say that we have moved from the history of severe distress and dysfunction in the banking
system, illiquidity and insolvency, interest rate controls and credit rationing to a market-based regime.
As part of the process, policies and measures were directed at improving the regulatory framework
and strengthening bank supervision to ensure increased efficiency and profitability of banks. A policy
environment of volatile and generally high
1. inflation, large exchange rate swings, and negative real interest rates over extended periods
resulted in an unsustainable portfolio of non-performing assets on the books of many commercial
banks that had to be cleaned out.
2. Heavy domestic borrowing by government to finance deficits and a growing domestic debt burden
crowded out private sector finance. Faced with an ample supply of relatively low-risk, high return
government paper, banks and other financial institutions have had little incentive to engage in - or
develop the capacity for - lending and equity finance for the private sector. The debt-interest rate and
price dynamics of the past has fostered a short-term perspective among both savers and lending
institutions. And one consequence has been very limited access by small and medium-sized
enterprises to credit.
3. Mr. Chairman, in the current regime of macroeconomic stability, banks are in a position to efficiently
play their primary role as financial intermediaries in the economic growth process, channeling funds
from savers to borrowers for investment. Today, macroeconomic stability is being increasingly taken
for granted and it is no wonder therefore that the focus of the debate in recent times has shifted to how
to accelerate growth and create employment. At the centre of that debate is a critical role for banks
and other financial intermediaries, and the need for a vibrant domestic capital market.
4. Effective intermediation requires that banks mobilize all available financial resources and deploy
them in income-generating economic activities. Banks must expand credit to the productive private
sector to support international trade, including sub-regional trade. Although there has been some
increase in real credit in the last few years, small and medium-scale enterprises still have considerable
difficulty accessing credit.
5. Mr. Chairman, since the theme of this award ceremony is efficiency and competitiveness in the
banking industry, let me now turn my attention to initiatives that we have pursued in that regard. Some
of these initiatives include the movement to universal banking, the adoption of an open licensing
system, and the modernization of the payments system, including establishing a central securities
depository and the passage of supportive laws.
6. Universal banking, which involves the removal of restrictions on banking activity, was introduced to
allow banks to choose the type of banking services they would like to offer in line with their capital, risk
appetite and business orientation. It removes for instance, the monopoly that was given to commercial
banks in the area of retail banking. It creates room for diversification of the range of financial services
that a bank can provide. It allows merchant banks for example to compete for retail deposits. This
process would lead to branch network expansion, increasing banking penetration, and also
competition for deposits at the retail level.
Universal banking also comes with a higher capital requirement, 70 billion cedis, and this will ensure
that banks are sufficiently capitalized to take on additional risk. Banks are also free to take on all
aspects of banking, retail,
1. corporate, etc, or they can choose to specialize in a particular segment. Universal banking would
therefore make our banks stronger, capital wise and therefore capable of undertaking intermediation at
a higher level.
2. Along with universal banking, the central bank has also adopted an open but selective licensing
policy, which allows the entry of new banks. The addition of new banks will encourage faster
modernization of banking operations and efficiency of the financial system, the better to support the
growth and diversification of the financial service industry. Competition should positively affect the
tariffs banks charge for their products and services, lower lending rates in line with credit risks, and
make credit accessible to all sectors in the economy. We continue to promote rural banking to improve
financial intermediation in the rural areas of the country where banking penetration is still low.
3. Mr. Chairman, we are aware that while the entry of new banks would increase competition,
excessive numbers within the system could dilute the franchise value of banks and increase instability.
Entry therefore has to be selective, well-managed, and paced over time and clear exit rules and
prudential supervision vigorously enforced to safeguard systemic stability.
4. Mr. Chairman, the Bank of Ghana has also undertaken a number of reforms of the payment system,
including the passage of a Payments Systems Act in 2003 and the introduction of the Real Time Gross
settlement System, which has created an environment for safe, sound, secure and timely payments.
While the clearing cycle for paper instruments has improved tremendously, the central bank would
soon switch to the Codeline Clearing and Cheque Truncation System together with an Automated
Clearing House in line with current trends in cheque processing technology. We are also pursuing a
policy to be supported by Ghana's Millenium Challenge Account, of integrating all 120 rural banks into
the national payments system through a Wide Area Network and supported by a rural bank
computerization and capacity-building program.
5. The Bank has also spearheaded the establishment of the Central Securities Depository (CSD) for
electronic documentation of all securities, which ensures virtually instantaneous security of title. It is
expected that listings on the Stock Exchange would migrate to the CSD. As banks increasingly
engage in universal banking, capital market activities would become important and the integration of
the banking and capital market operations would be facilitated by these payment and depository
systems.
Mr. Chairman, it is clear that the central bank has been putting in place the payments system
infrastructure that would facilitate a competitive, efficient banking sector. And the banks on their part
have been introducing new services and modernizing their systems. We notice, however, that
competition is not well reflected in the pricing of banks' services and there is a general feeling of
market participants that banks are over-pricing risks in the economy judged by real interest rate
spreads; this may be as a result of information asymmetry. Yet corporate banking responsibility
requires that banks deliver
1. efficient services at competitive rates. In view of this, we are working to put in place another piece of
infrastructure, the Credit Reporting Bill to underpin the establishment of Credit reference bureaux. The
draft bill should be passed into law this year. It should facilitate credit risk assessment and foster a
culture of repayment of loans.
2. Mr. Chairman, as we honour banks for excellence, let me at the risk of dampening some of the
exuberance on display, by noting that the consumer complaints unit at the Bank of Ghana has
received and dealt with a number of complaints by customers of banks. These complaints normally
border on unfair banking practices and include; high interest charges on loans and overdrafts, high
bank charges on transactions, non-payment of interest on savings accounts, delays in crediting
interest on treasury bills, and high initial deposit and minimum operating balances. I hope that the
recipients of the various awards are not that much guilty of such practices.
3. Mr. Chairman, global developments in regulation and supervision of banking is shifting to a focus on
risk and the holding of commensurate level of capital. Basel II, the new capital framework to be
implemented in 2007 by the advanced countries, is a risk-based framework.
4. For our banking system to remain competitive, the players must understand the risks they
undertake and be able to measure and manage them profitably. In line with that we are re-orienting
our supervisory focus away from just compliance with norms to a system of risk-based supervision.
This will involve re-orienting our approach towards implementing a risk-based supervision process. In
this framework our supervisory effort will be directed towards how well banks assess their risks and
how actively they are managing these risks and their capital, thereby minimizing systemic problems for
the entire banking system.
5. Mr. Chairman, as you may be aware, the end of this year is the deadline for all banks to become
compliant with the mandatory capital level for a universal banking license. Over the years some
progress has been made in banks re-aligning their capital with that minimum, but a number of banks
are yet to get there. It is my hope that these banks would explore all the options, including mergers
and listing on the exchange to raise the additional capital for re-licensing. Attaining an enhanced level
of capital is crucial for competition in the banking industry, both locally and sub-regionally.
6. Mr. Chairman, the theme for this evening's event 'An Efficient Banking Sector for Competitive
Advantage in the Sub-Region' is indeed very appropriate. The Ghanaian banking system must aim to
re-position itself to support the strategy of moving to middle-income status and to compete in the wider
global sub-regional and even global market. The central bank will continue to support the financial
services sector through appropriate policy initiatives and legal framework. In this regard, the new
foreign exchange bill as well as the anti-money laundering bill, which would be passed into law this
year, should serve to underpin the competitive edge of Ghanaian banks and the financial system in an
increasingly competitive global environment.
1. Mr. Chairman, in conclusion, the initiative of banking awards to encourage competition and
efficiency in the banking industry is a worthy one. I hope that the banks that have won awards today
would be spurred on to further excellence. I also hope that other banks would take a cue from this and
work harder in the ensuing years, so that they also can become award winners. And the industry as a
whole will continue to enjoy the growing confidence of all stakeholders.
2. Mr. Chairman, Ladies and Gentlemen, I thank you all for the invitation to be part of this event and
for your attention.
Thank you.