Governor’s Speech at the Maiden Annual Lecture of the ACAMB
Source: bank_of_ghana
Date: 2005-08-12

1 MAIDEN ANNUAL LECTURE OF THE ASSOCIATION OF CORPORATE AFFAIRS MANAGERS OF BANKS (ACAMB) THEME: “HOW BANKS CONTRIBUTE TO ECONOMIC GROWTH AND INTEGRATION IN THE WEST AFRICAN SUB-REGION” ADDRESS BY DR. PAUL A. ACQUAH, GOVERNOR, BANK OF GHANA Abuja Nigeria, August 12, 2005 His Excellency, Alhaji Atiku Abubakar, Vi ce President of the Federal Republic of Nigeria Ministers of State and Government Officials Members of the Diplomatic Corps Chief Executives of Banks Distinguished Guests and Stakeholders Media Practitioners Ladies and Gentlemen 1. I deem it a great privilege and honour to be invited to this august occasion as a Guest Speaker. First of all let me express my sincere appreciation to the organizers as well as the executives and members of the Associ ation of Corporate Affairs Managers of Banks (ACAMB) for the opportunity to give this Annual Lecture. The theme is “ How banks contribute to economic growth and integration in the West-African sub-region”. 2. The Association has cho sen this theme for its maiden lecture, I believe for good reasons and at an appropriate time. It is not because there is doubt about the role of banks in the deve lopment process, or that th e banking indu stry needs to reassure itself of its role and responsibiliti es in growing our econom ies. I think it is because the banking profession, and certainly, central bank Governors have a critical interest in the unfolding pr ocess of economic and moneta ry integration in the sub- 2 region and in the entire monetary cooper ation arrangements that envisage a single currency and a single African Central Bank for the continent. 3. In deed, two recent events make this theme very relevant and timely. In May this year, the Authority of Heads of States of the West African Monetary Zone (WAMZ) reviewed progress made under ou r single currency project and decided to set a new date of December 2009, instead of July 2005 that has just passed, for the launch of the single currency for the regi on. The markets did not greet this news with any surprise. In post poning the D-day however, the Authority established an agenda for reform that has significant implications for banks and the financial sectors of the Zone. I will return to this later. Th e second event wa s the decision by the Association of Afri can Central Bank Governors to harmonize convergence targets and time frames and speeds of adjustments under the five regional cooperation programs in Africa to achieve monetary union at the continental level. Again this forward-looking program and vi sion places all of us as bankers, and especially those in policy ma king and management positi ons squarely in the eye of the storm. 4. So, Ladies and Gentlemen, you will unders tand why in my vi ew this theme is very topical and even strategic and geopolitically correct. I should add that, I detect a measure of symbolism in exte nding this invitation to me for this inaugural lecture. The Bank of Ghana ha s been cooperating closely with the Central Bank of Nigeria especially on issues of poli cy convergence and the re forms needed to underpin monetary cooperation under the WAMZ single currency project. So I have a very good reason to be here, and especially to have Your Excellency Vice President of Nigeria, grace this occasion. 5. Your Excellency, Mr. Chairman, Distin guished Ladies and Gentlemen, banking is business and a good bu siness at that bu t one that demands integrity and unquestioned reputation. The Goldsmiths, who originated bank ing saw a business 3 opportunity as they realized that people who deposited gold with them only withdrew a fraction at a ti m e a s o t h e r s p l a c e d m o r e d e p o s i t s . T h e y r e a l i z e d t h a t they could make profits by lending out a proportion of the gold deposits counting on the chance that all the go ld would not be called upon at any one time. But they were not experts in the theory of probability. In doing so, goldsmiths capitalized on their most important asset which was thei r reputation, and that hinged on their ability to assess the risk of every borrower. They were acutely aware that if at any given time the public lost confidence in the ability of the gold smiths to safeguard their deposits, a run on them would bring certain calamity. 6. Mr. Chairman, over time the business of banking has grown in complexity but has fundamentally remained the same. Bank s perform the basic role of financial intermediation by channeling funds from savers to borr owers in the economy. This intermediation role of ba nks is fundamental to the functioning of any modern economy. Banks are able to pool funds from a large number of small savers to make loans to other businesses wh ich produce goods and servi ces, create employment, pay taxes to government, fi nance investments and drive economic growth, and yes, in tune with current literature, also drive poverty reduction. 7. A modern economy cannot function pr operly unless it is possible for people and companies to save or bo rrow money in order to make investments, insure their property as well as possessions. Banks and other financial institutions take calculated risks, working within an infr astructure of a payments and settlement system, to provide services and a variety of products in organized and orderly financial markets. It is not hard to see th e close relationship between efficient financial systems and economic growth. Sometimes we take this intermediation role banks perform for granted but it is diffic ult to imagine the im plications for our economies if banks did not exist. 4 8. Mr. Chairman, the health of an economy is intertwi ned with the health and soundness of its financial system. Therefor e, we can understand why the stability of the financial system is a matter of fundamental public interest. In a sense banking is a public good produced by private market participants motivated by profit but the cost of failure on the part of an institutio n could be incalculable for the society. The history of banking crisis all over the wo rld indicates that wi thout the assurance of the general public that banks are well-capita lized, liquid and sound, the intergrity of the financial system, like th e Goldsmith, would be at risk. The system would be unstable, prone to a run on banks, resulting in their cl osure, financial distress for depositors; and the economy vu lnerable to flight of capi tal, possible exchange rate depreciation, and decline in output. Sound prudential regulation is therefore essential and good for the banking industry. 9. The Asian crisis of 1997 is a recent reminder not merely about the systemic nature of financial crisis and its contagio n effects, but it is also about a host of problems of inadequate financial regu lation, that has become known as“crony capitalism”. In an interdependent economic environment in which we live today, the impact of financial crisis in one country is no longer localized but can spread rather quickly to other parts of the world. As we prepare to allow ca pital to move freely across our borders in the su b-region, in a single mone tary space, we should be mindful that all our countries will be open to financial crisis whether originating locally or abroad. The challenging ta sk is how do we ensure that the Banking/financial system is stable and seek to avert crisis particularly in a regime of capital account liberalization, which is one key objective of the WAMZ project. 10. Mr. Chairman, there is a sound basis for the prudential regulation and supervision of our local as well as the global financial system. It is in the fundamental interest of ev ery economy to have a well regulated financial system that ensures its stability an d protects the integrity an d safety of the financial markets. And, it has become imperative that we adopt intern ational standards of 5 best practice in the regulati on of our financial system along with the necessary best practice and standards of transparency in other areas of financial management. 11. The oldest multilateral financial institution in the world, the Bank for International Settlements in Basel, Switzerl and, has over the ye ars worked for the adoption of international best practice and standards, in pa yment and settlement systems, banking supervisio n, and prudential regulations. This work provides guidance to ensure the stab ility of the financial system and reduce the probability t h a t a w e a k l i n k i n a n y p a r t o f a n i n t egrated system becomes a source of major systemic risk that will endanger the stability that is indispensable for growth. 12. What can bankers do? Mr. Chairman, strong financial institutions operating in a stable macroeconomic en vironment are the bedrock of financial stability. Strong financial institutions typically have a strong capital base well aligned to their risk profile ; with quality portfolios of assets, high accounting standards, and robust balanc e sheets; and they have a cu lture of timely disclosure of information and submit to the discipline of the market . They are assets for their managers and shareholders. Such institutions are less vulnerable to external shocks and are therefore a source of resilience for an economy. This is why banking regulators have to be firm. But they also have to be forward looking in setting the regulatory framework. The dynamics of th e market today is su ch that banks and other financial institutions develop a wi de variety of financial products with increasing frequency; and so the regulato ry framework has to be adaptable to meet the changing demands on the banks and the financial system. For example, a minimum capital requirement that may a ppear to be sufficient today might be woefully inadequate tomorrow and regulators have to consistently prepare to deal with such developments in the financial system. 13. Mr. Chairman, prudential regulation, and banking supervision, specifically the implications of Basel II was the subject of a recent symp osium of the Association of 6 African Central Banks in Accra. As mentioned earlier, the Bank for International Settlements has been at the forefront of developing the principles and guidelines for application worldwide. We first had the Basel Accord in the 1980s (Basel 1) which has since proved inadequate to deal with the growing complexities of the financial system. Basel II provides a more comprehensive framework for addressing risks, providing tailored applications and more ri sk sensitivity and incentives for better risk management by both regulators and financial institutions. 14. Mr. Chairman, Basel II has raised a lot of eyebrows in the banking community. It has been d escribed as too complex and not entirely relevant for banks in developing countries, such as those in our sub-region. In a way this is an argument for complacency and doing nothin g . A t i t s h e a r t , B asel II is about risk management and as regulators and banker s we need to build our capacity and those of our corporate customers in managing risks. 15. I t i s t r u e t h a t B a s l e I I i s v e r y d e m anding in terms of resources, financial expertise and skills. For developing count ries, all this raises serious challenges in implementation. And, we cannot understat e the importance of constraints we face such as lack of adequate technical skills, under-development of the financial markets, structural rigidities and less robu st legal systems that will need to be addressed to move to Basle II standard s. But the cha llenges that these pose should provide the impetus fo r us to examine the way we do business and strive to achieve international standards of best pr actice in prudential regulation and risk management. We have to overcome these cha llenges so as to be able to reduce the risk rating of our sub-region and lower the cost of borrowin g of our corporate customers. Banks that have the ambition to become in ternationally active could lead the way. 16. Mr. Chairman, many of the countries in our sub-region have had functioning banking systems over the years, and we ha ve had our share of banking difficulties, 7 with distressed banks weighed down by the burden of non- performing loans. The root cause of the problem for the most pa rt is macroeconomic instability. Most of our economies are emerging fr om a historical past wher e the norm was a situation of high and variable inflation and volatile exchange rates, with all the distortions and attendant risks which have affected banks. 17. We have managed to break away from this past (if not in the process of breaking away). We are embracing sound financial policies. We have started addressing most of the structural proble ms and other distorti ng legacies in our economic systems and forging ahead, consolidating ma croeconomic gains. Vigilant, firm and even handed su pervision of banks, and well-designed prudential regulations are necessary to reduce the vu lnerability of financial systems in the region to shocks. This sh ould serve as a healthy en vironment for the financial sector to operate, and as a durable foundation for growth. And as experience has shown this would only be sustainable in a low inflation environment. 18. Ladies and Gentlemen, high and variab le inflation creates incentives for misallocation of resources an d uncertainty. It makes busi ness planning difficult. It ends up in arbitrary and inequitable distri bution of incomes, an d it serves as tax on incomes, that hits the poor the hardest. High and vola tile inflation is a powerful force for stifling growth . And it is bad for the bankin g business, it is bad for trade and an impediment to the regional integration process. 19. Mr. Chairman, it is understandable that as a fundamental pillar of the West African Monetary Zone (WAMZ) single currency project, our countries Nigeria, Ghana, Sierra Leone, The Gambia and Guinea have committed to placing our economies on the path of low and stable inflation as key to securing macroeconomic convergence. This is for good reason be yond the need to keep inflation under control. The union that we en vision will be an economic entity that would provide for three freedoms; the free ci rculation of goods, the free movement of capital, and 8 the free movement of labor, with a unique central bank and with complete fiscal autonomy for each of its member countries. This would mean a complete change in the fiscal and monetary regimes that we now operate. It has been said that the convergence exercise is a process of reconc iling unpleasant fiscal arithmetic with unpleasant monetary arithmetic and it would be difficult to manage if members were to enter the monetary union with very divergent fiscal positions, and underlying inflation outlook. 20. In a monetary union, fiscal deficits can no longer be absorbed under a “no bail out” policy by the central bank. Wi thout adequate conver gence to sustainable fiscal positions, the requir ed adjustment (e.g. through expenditure cuts or tax increases, if there is room) needed by a member to cope with shoc ks particularly of the asymmetric type might well be implau sibly large and politically difficult and a source of tension, if not conflict, in th e union. Members will yield sovereignty over monetary policy to a common central bank and lock into a fixed exchange rate for all zonal transactions. The common centra l bank will necessarily depend for its effectiveness on free capital movement and an integrated and efficient financial market for the transmission of monetary policy. For a commitment to the price stability goal it will have to be operationally independent of the fiscal authorities of members to be credible and successful. In sum, fiscal convergence in the sense of bringing public finances under control to the point where budget deficits and debt to GDP ratios are sustainable and consistent with price stability across the board is essential for a robust and resilient monetary integration. 21. The convergence criteria for monetary union within the WAMZ have been designed to encourage countr ies to pursue disciplined mo netary and fiscal policies. They are essential to set the stage, not on ly for a single currency but more importantly to build the foundation fo r successful monetary integration. These criteria not mere targets to be reached at a single point in time as a trigger for the launch of the single currency or as a tick et for entry by members into the zone. 9 Rather, they are intended to serve as summary indicators designed to track progress in implementing disciplined economic poli cies and sustained structural reforms. This is critical in assessing the potential success of the union in terms of members’ economic competitiveness and resilience to future shoc ks and external payments viability. 22. Convergence criteria should be based on comparable data and information to provide a true yardstick to evaluate the success in making macroeconomic adjustments. It is therefore understand able that the WAMZ and all the regional monetary cooperation programs are focu sing on our econom ic statistics and concepts looking to harmonize the design and to give meaning to these criteria. These questions on statistical measurements aside, the cooperation agenda seeks to harmonize the accounting systems, bankin g regulations, budget nomenclature, the legal framework of public accounting and practices etc. In this way, we would weave the fabric for efficient functioning of financ ial and other institutions in a competitive regional economic space. 23. It goes without saying that an effi cient financial market and integrated financial system will be vital for the effects of monetary policy that the common central bank will pursue to be transm itted through the economies of all member countries within the common currency zone . There is a need for the establishment and harmonization of payments system infrastructure fo r the efficient settlement of transactions and the transmission of mone tary policy decisions. Commercial banks have to be forward-looking in this rega rd as they develop their payments and settlements infrastructure. 24. Your Excellency, Mr. Chairman, Di stinguished Ladies and Gentlemen, monetary integration, in particular the single currency project, was placed on a fast- track as a vehicle for econom ic integration in the ECOWAS sub-region. To date, the barriers to the movement of goods across the sub-region remain formidable and 10 need to be lowered if not removed, and tariffs harmonized within a multilateral framework to give real meaning to the ECOWAS Trade Libera lization Scheme and other protocols. I should note that this also features prominently in the design of the WAMZ reform agenda going fo rward. Otherwise the benefits of integration will be elusive. Indeed, the ECOWAS Trade Liberalization protocol offers a vehicle for and a test of commitment to integr ation in the sub-region. Bank s have a major facilitation role to play in enhancing trade within the sub-region. 25. Mr. Chairman, there are many potential benefits of monetary integration in terms of the reduction in transaction cost s, the increased size of the market for firms’, increased trade within the sub-region, greater currency stability. However, the benefits will only come if we do our home work properly, including implementing the necessary macroeconomic policies and the structural and other policy reforms, and strengthening trade an d sectoral linkages that are essential for economic growth in the sub-region. 26. Your Excellency, Mr. Chairman, Distin guished Ladies and Gentlemen, this is why in the next phase of the WAMZ project emphasis is being placed on the harmonization of payments systems, bankin g laws, statistics, and the liberalization of trade and capital account transactions between member countries and has established distinct time lin es for the attainment of clea rly specified objectives. The banking system, and the corporate client s that you manage and serve would be instrumental in the realization of these objectives, and in achieving the ultimate goal of integration of the sub-region in a single financial and economic space. 27. Your Excellency, Vice President, Mr . Chairman, Distinguished Ladies and Gentlemen, let me once again express my sincere appreciation for the honour done me to participate in this maiden lecture. Thank you all for your attention.