FINANCIAL MARKETS IN GHANA
The banking systems has developed systematically over the years and presently consist of 17 banks engaged variously in commercial, development and merchant banking and 130 rural/community banks.
The roles of banks in the economy are facilitated and complemented by other financial institutions comprising 2 money market institutions (discount houses) and a number of non-banking financial institutions operating in the areas of stock brokerage, finance leasing, hire-purchasing, general financing and funds management. There is a stock exchange which provides the platform for primary and secondary dealings in the equities of listed companies. A list of major banks and non-banking financial institutions is the Appendix. The mode of supervision of the banks and non-bank financial institutions is the same although the thrust of this paper is on the supervision banks.
The rest of the paper is structured into five parts as follows: Part 1 focuses on objectives of banking supervision; part II deals with the techniques of supervision; part III touches on the financial sector reforms; part IV highlights the incidence and management of distressed in banks in Ghana and part V concludes the paper.
Objective of Banking Supervision
Banking Supervision entails an on-going monitoring of the operations of banks and the enforcement of banking regulations and policies with the objective of promoting the safety, soundness and stability of the banking system.
Deposits are the lifeblood of a bank. Unfortunately, depositors have no control over the use to which their funds are deployed. The situation therefore exposes them to a lot of risks, the most serious being loss of their deposits. In this respect, the supervising authority has the responsibility to ensure that the interests of depositors and creditors of banks are safeguarded. The interests can be safeguarded only if the banks’ liquidity is adequate at all times; their long-term solvency is unimpaired; they are being run as profitable going concerns and have competent management. Banks are expected to plough back part of their profits to build-up reserves to provide a cushion for contingent losses. Banking supervision also ensures that monetary and banking guideline designed to foster an efficient and competitive financial system and monetary stability are complied with.
Banking supervision seeks to achieve the set objectives of ensuring protection for deposits, monetary stability, efficiency and competition among banks b ensuring:
The compliance with the provisions of Banking Law and regulations;
That banks have sound methods of operations and efficient internal control systems to safeguard their assets;
The recognition of early warning signals and matters of serious prudential concerns for the necessary remedial actions;
The appraisal of the competence of bank’s management;
That the business performance as measured by deposit growth and asset expansion is sound; and
The provision of minimum standards of accounting and auditing for banks.
The methods of banking supervision entails: conducting on-site examination; collecting and analyzing regular reporting returns and other statistical data; providing guidance as to accounting policies and practices to be adopted; liaising with internal and external auditors tp ensure that all high risk areas are audited; appraising opening applications for the issuance of banking license for new banks and authorizing the opening, closure and relocation of bank branches.
The Banking Law, 1989 empowers he Bank of Ghana with the supervisory authority over the business of banking in Ghana. Consequently, the central bank has the responsibility to ensure that: the solvency of the banking system, quality of assets, adequate liquidity and profitability are maintained; adherence to statutory and regulatory requirements is enforced; and the implementation of socio-economic policies and development objectives of the government is maintained.
TECHNIQUES OF SUPERVISION
The methods employed by bank supervisor in the surveillance activities comprise: off-site supervision, on-site supervision and investigation and follow-up.
This is concerned with on-going analysis of prescribed prudential returns submitted by the banks and previous examination information. This system is used to monitor a banks’ performance between examinations and though an early winning system indicates when special examination or emergence measures might be necessary.
In general, the system analyses and evaluates the performance of banks by determining the accuracy and reliability of the returns submitted and calculating a number of financial ratios including capital adequacy ratios, desegregated assets and liabilities ratios and profitability ratios. The financial ratio for a particular banks are then compared with its past performance or peer banks. Any adverse observation/matter of supervisory concern are communicated to the concerned bank’s management for corrective action.
The banks are currently required to submit 12 prudential returns with varying frequency. These cover the following aspects of bank’s operations.
Form Type Frequency Limit
BSDI Liquid Reserve Assets Weekly 9 days
BSD2 Statement of Assets & Monthly 21 days
BSD3 Large Exposures – Monthly 21 days
Advances & Deposits
BSD4 Analysis of Loans, Weekly 21 days
Overdrafts & Other
BSD5 Capital Adequacy Return Quarterly 21 days
BSD6 Maturity Analysis of Quarterly 21 days
Assets & Liabilities
BSD7 Current Year Results Quarterly 21 days
BSD8 Advances subject to Quarterly 21 days
BSD9 Consolidated Balance Quarterly 21 days
BSD10 Capital Expenditure Half-yearly 21 days
BSD11 Statutory Return Half-yearly 21 days
BSD12 Opening Closure or As necessary
Re-location of Bank
Branches and Agencies
Even though the prudential returns serve useful supervisory tools, they have limitations. For example, a bank could submit wrong and/or incomplete records either deliberately or inadvertently. Secondly, it is difficult, if not impossible, to do a qualitative analysis of a bank’s assets and liabilities based on the returns alone. The returns may not contain enough information to enable one to attach risk factors to assets of a bank. Thirdly, returns are prepared as at a point in time and therefore, fail to capture the general patterns of a bank’s assets and liabilities. Finally, returns are normally designed for the whole banking system and may fail to register peculiar operational characteristics of a bank. In view of these shortcomings, supervisory authorities in addition to receiving returns, do on-site examination of banks.
An on-site examination enables a supervisor to make comprehensive and an objective appraisal of a bank’s financial position and management competence. It enables the supervisor to have access to primary data and records. It also affords the supervisor/examiner the opportunity to obtain on-the-spot clarification and also discussions with management and operational staff without resorting to time-consuming and energy-sapping correspondence.
Since the primary purpose of supervisory examination is to protect the interest of depositors and investors, supervisory examiners tend to emphasis the following adequacy of capital, quality assets, future earning ability, liquidity, internal control and management ability.
The share capital is the amount contributed by the owners of the bank. It serves as buffer against losses that might be incurred in the normal course of business. In the old Banking Act (1970), a minimum of 5 % of total mobilized resources was considered adequate capital for a bank to operate. Thus, capital bore a direct relationship with deposits. Under the new Banking Act of 1989, however, emphasis has been shifted from liquidity to risk assets and what is considered adequate capital must bear some relationship with risk assets on the books of bank. The new Banking Law prescribes minimum capital adequacy ratio of 6% to be measured as a percentage of the capital base of the bank to its adjusted asset base in accordance with the provisions of 1st schedule to the Law.
One of the most important assets on a bank’s balance sheet is loans/overdrafts. Normally, these figures are presented as an aggregate amount in a balance sheet. To be able to assess the quality of the advances figure therefore, one has to classify it into types of lending, maturities, type of interest rates, nature and value of securities pledged, inside loans, etc.
The items on which a bank earns income directly are bills, investments and advances. Of these three, the most significant is advances. A performing advances portfolio therefore ensures good earning. In addition, there are numerous performance indicators that can be worked out to determine the current and future earnings ability of a bank. Some of these are: –
Return of Assets = Net Profit
Average Total Assets
Return on Earning = Net Income
Average Interest Earning
Return on Equity = Net Profit
Average Shareholders’ Fund
Gross Yield = Interest Received & Receivable
Average Interest Earning Assets
Interest Margin = Net Interest Earning
Interest Earning Assets
Interest Payable = Interest Paid & Payable
Percentage Average Interest Bearing Liabilities
Expenses to Income = Total Expenses
Income per Employee = Net Income
Total Number of Staff
Primary Liquidity Ratio = Current Account Balance with BOG
Total Deposit Liabilities
Secondary Liquidity Ratio = Prescribed Securities
Total Deposit Liabilities
Past Due Ratio = Gross Loans – Current Loans
High Risk Ratio = Gross Loans – (Current Loans + OLEM)
Loans Loss Provision /Gross Loan Ratio
Earning Assets/Total Assets Ratio
The results of these ratios should give a good indication as to the earnings ability of a bank.
The essence of liquidity is to ensure that a bank is in position to honour customers’ withdrawals at all times. Liquidity is divided into primary and secondary concepts. Primary reserves are made up of cash and bank balances. Secondary reserves are made up of bills and government papers such as treasury bills and government stocks and bonds and monies due from there will be a back-up support if the primary reserves run out. Of course, the central bank reserves the right to amend the ratios as and when it deems fit.
Internal accounting controls are relied on extensively by auditors and supervisors in the normal course of examination. For example, banks are supposed to do a daily posting and trail balancing of the general ledger to produce a daily balance sheet. Subsidiary ledgers and memorandum accounts must be maintained. Internal inspection and audit reports must be generated. MIS must be produced regularly and fed to management. In carrying out these assignments, work must be so apportioned as to ensure that no one person handles the entire spectrum of a transaction. The auditor/examiner checks to see that the routines of ledger posting and balancing, maintenance of subsidiary ledgers and the use of memorandum accounts and other internal accounting control procedures are being maintained. This renders the financial statements reliable.
Management has an all-embracing attribute. If the capital of is sound; the quality of its assets are good; its earning sufficient income on its assets; is in a good liquid state, and its accounting data and financial statements give a true and fair view of the state of its affairs, then can safely conclude that the government of that institution is good.
Follow up exercise on findings of examination reports and lapses detected in off-site surveillance is carried out until all the adverse features and supervisory concerns are addressed within a time frame. Adhoc visits/investigations and scrutinies are also conducted when the need arises.
The other supervisory activity relating to banks include general control and approval of bank branches.
Banks and non-banking financial institutions intending to accept deposits from the public are required to obtain operating license should be a body corporate, incorporate in Ghana. The application should be accomplished by: a certified true copy of the regulations or other instrument, relating to the proposed business of banking; particulars of directors of persons concerned with the management of the stand business; a feasibility report including a business plan and financial projections for the first five years; and such other information as the central bank may require i.e. certified assets and liabilities of shareholders/directors, operating policies and manuals, suitable premises etc.
Banking license is issued if the central bank is satisfied with all related issues raised on the application and submission of certified financial statement of affairs by the proposed bank.
The Banking Law requires a bank in distress to inform the central bank and the latter may assume control of and carry on the bank’s business of banking either directly or by an approved agent until operations are stabilized before withdrawing and handing over the bank to a new and competent management appointed by the bank’s Board of Directors with the approval of the central bank. The Law further empowers the central bank to approve the opening of a new branch or agency of a bank or closing down or changing the location of any branch or agency of a bank. Consideration is given for such application by reviewing the banking needs and the resourcefulness of the locality, the previous or projected performance of the branch and the capacity of the bank to incur additional capital investment as the situation may be.
FINANCIAL SECTORS REFORMS
As the Economist Recovery Programme ERP got underway in April, 1983, it was realized that a robust and competitive banking sector was an essential vehicle for sustaining the economic reforms. In 1987, the Ghanaian Government commissioned a diagnostic study to identify the weaknesses in the banking sector and to formulate appropriate policies to address the shortcomings. The problems identified included low capital base, over-exposure to few customers, weak accounting and management information systems, ineffective auditing and internal controls; and weak supervision and generally deficient legal and regulatory framework.
In response to these findings, the Government, with financial assistance of the International Development Association (IDA), introduced the Financial Sector Adjustment Programme (FINSAP) with the object to, among others, restructure banks that were distressed; improved deposit mobilization and enhanced efficiency of credit allocation; reform the banking laws; improve the supervision and regulatory framework.
Measures to liberate the financial sector began in 1987, included deregulation of interest rates and bank charges, phased removal of credit and exchange controls and the liberalization of trade accompanied by market determination of the exchange rate. Conditions were also laid out for the orderly entry and exit of banks. These measures created conditions that exposed the entire sector to market discipline. In addition, a framework was established by the Bank of Ghana for indirect monetary management through effective use of open market operations.
To provide an appropriate regulatory framework to strengthen the banks, a new Banking Law, PNDC Law 225 was promulgated in 1989. The new law remedied the inadequacies of the old one by establishing clear guidelines for both banks and the regulatory authorities among which were, minimum paid-up capital and capital adequacy requirements, risk exposures to individuals, groups and subsidiary companies of bank relative to their net worth, as well as restrictions on direct exposures to agriculture, commerce and industry. Other measures are prudential lending limits, guidelines for determining provisions for possible loan losses, prudential reporting requirements, uniform accounting and auditing guidelines for banks based on international standard and penalties for violations of the law.
Deregulation of Interest Rates
Under the ERP, in February 1988, interest rates were completely deregulated and since then, banks have continued to determine their borrowing and lending rates. The pre-ERP era savings deposit rate which was 8 percent currently range between 25 and 31.5 percent. The upward movement in the interest rate structure reflected the rising rate of inflation. The liberalization of the financial market has enabled the banks to mobilize domestic financial savings for their operations. The successful mobilization of deposits by the banking industry has enhanced the bank’s liquidity and profitability.
Lifting of Credit Ceiling
In January 1992, the liberalization of the banking system became complete when the Bank of Ghana (central bank) finally abolished credit ceilings and begun to rely on indirect monetary measures to control credit expansion. Banks in Ghana now operate within the confines of supply and demand in the money market with the regulatory framework of the new banking law. They now set their borrowing and lending rates, are free to levy their own charges and commissions as well as set their own limits on loans and advances. This change in policy was made possible under an evolving open market-type operations and a monetary programming instituted by the Bank of Ghana in the mid-1990. This policy has enabled the banks to become more innovative in their operations, overhaul their credit policies and strengthen their credit appraisal, loan monitoring and loan recovery systems.
Removal of Exchange Controls & Establishment of Forex Bureaux
In furtherance of the objectives of creating competitive conditions in the economy for efficient resource mobilization, exchange rate controls were abolished. The removal of the exchange controls has assisted some banks to source lines of credit from their overseas correspondent banks to service the needs of their domestic customers. Conditions were created for the development of a market in inter-bank dealings and policies were fashioned which allowed the establishment of foreign exchange Bureaux.
Legislative Reforms in the Financial System
In other to strengthen the financial system, a number of laws have been promulgated since 1992. These include: Bank of Ghana Law, 1992 (PNDCL 291); Non-Bank Financial Institution Law, 1993 (PND 328) Securities Industry Law, 1993 (PNDCL 333); and Financial Lease Law, 1993 (PNDCL 331).
The Bank of Ghana Law (1992) streamlined the structures, functions and powers of the bank, and emphasized its role as a supervisor and a regulator of the banking and financial system in Ghana. The Non-Bank Financial Institution Law, introduced necessary reforms appropriate for the licensing, regulation and supervision and prudential reporting requirements for all non-bank financial institutions. A new department has been established within the Bank of Ghana to develop the framework for regulation and supervision of these institutions. The Securities Industry Law, was promulgated to regulate and maintain surveillance over the securities industry. The Securities Regulatory Commission is now being fully established with a permanent secretariat. The Financial Lease Law, was promulgated to regulated finance leases and to prescribe statutory requirements for formulation of a lease agreement.
Apart from those legislative reforms, the monetary authorities embarked on the restructuring of banks based on a two pronged approach involving operational and institutional measures.
The operational package of measures were aimed at restoring solvency to the distressed banks (both major banks and rural banks) and creating conditions needed for bank management to make their banks competitive and commercially viable. Non-performing loans in the banks’ portfolio were removed and transferred to a newly created and wholly-owned government agency, named “Non-Performing Assets Recovery Trust” (NPART). The recapitalization exercise involved the removal of non-performing loans in the banks’ portfolio and these were replaced with Bank of Ghana bonds to enable the affected public sector banks to meet the minimum capital adequacy requirement of 6%. In order to facilitate the process, a special tribunal was created and vested with powers to speed up the asset recovery process of NPART. The creation off NPART has helped to recover monies which otherwise would have been lost by banks.
Measures were introduced to strengthen internal management, operating systems and controls of banks. In 1990, the Government changed the top management and reconstituted the boards of directors of all banks undergoing restructuring. This was based on the perception that a strong and efficient management was a necessary precondition for the rational application of financial resources and for a successful implementation of the reforms. Twinning managements with selected foreign financial institutions were made for some banks. In addition, turn-around management teams of banking/management/financial consultants were attached to some banks.
Under cost-reduction schemes, staff retrenchments and branch rationalization programmes were pursued by most banks. This involved the closure of non-profit making branches and opening of viable branches. The effect has been the reduction of the total number of bank branches from 381 in 1989 to 309 in 1996.
Within the Bank of Ghana, measures were taken to strengthen the supervisory and regulatory framework. In particular, the Banking Supervision Department (BSD) has been strengthened and its role considerably enhanced through technical assistance in the form of foreign experts, training and equipment. As a result, the Department’s manpower and supervisory capacity have also been increased in consonance with the wide ranging powers in the Banking Law. In addition, new reporting formats were designed and introduced which requires banks to furnish BSD with information on several aspects of their operations. Accounting and auditing manuals were also compiled for use by banks, auditors and accounting firms to ensure uniform reporting.
Realizing the importance of training of the restructuring exercise, the Government has established the National Banking College (NBC) to enhance the performance of middle and senior bankers in the industry. By end of December 1995, 18 courses on various functional areas in banking and 3 seminars for top management executives had been held. The focus of the training has been on credit and foreign exchange management development. It is expected that the activities of the National Banking College would enrich knowledge in the relevant functional areas of banking and help bring about additional changes.
An integral part of the reform programme is the development of a capital market. The main objective is to make the financial system less bank-oriented and more responsive to the needs of the economy for long term finance. The Ghana Stock Exchange (GSE) was incorporated as a private company and commenced business in November 1990 with a mission to spearhead the development of an active capital market.
Since its establishment, the Exchange has performed very well in providing liquidity in traded securities, but slow progress seems to have made in its primary function, namely, to provide a mechanism for raising capital for enterprises. The equities market has remained essentially under-developed, making the banking sector still the largest source of both short-term and long-term finance for business enterprises.
To ensure more efficiency in the operations of public sector banks, the government embarked on a programme of privatization, the first stage of which began in 1995 when government sold part of its equity stake in Social Security Bank Limited (SSB) to the public and then further sold part of its shares in Ghana Commercial Bank Limited (GCB) in 1996. There are plans for the divestiture of government equity in the development banks National Investment Bank (NIB), Agricultural Development Bank (ADB), Bank for Housing and Construction (BHC) with NIB expected to take the lead.
The Ghanaian financial scene is gradually developing with diversified institutions specializing in various activities that are conducive to money and capital markets deepening. As a result of the reforms, the banks have been strengthened and are in a position to offer a wide array of financial products to customers. The requirements of the Banking Law have enabled the banks to boost their capital base as well as improve risk management inherent in their operations. The industry’s average capital adequacy ratio which was minus 26.1% as at the end of December 1989 has risen over the years to 10.7% at the end of December 1996. Today, the profitability of the banking industry owes much to the rigors of the banking law and the congenial economic environment. As a result of the reforms, the performance of the banking industry environment has been quite satisfactory. The banks have generated profits; their rates of return on capital have been growing.
They have built up capital and reserves and have generally been highly liquid. These achievements are reflected in the balance sheet structure of the banks and the key financial indicators in the pre-reform and post reform years.
The financial system in Ghana continues to grow with the entry of new banks and other non-bank financial institutions. The admission of these new institutions would, it is hoped, open up the financial system to competition and innovation to enhanced the quality of financial services in the economy.
Bank distress or insolvency is the inability of a bank to meet customers’ withdrawals and other financial commitments. The absence of any sustained measures to remedy a situation like could lead to a bank failure. In general, bank distress may arise from any or a combination of the following incidences:
Managerial incompetence arising from adoption of inappropriate policies and measures which fail to provide positive direction for a bank;
Inadequate supervision caused by absence of an effective regulatory framework, verification and/or enforcement.
Poor loan asset quality due to inordinate loan growth without recourse to debt servicing ability of beneficiaries and government interference as to direction of credit;
Assumption of substantial non-funded business commitments which tend to saddle a bank with huge financial burden on crystallization;
Liquidity reserve requirements coupled with imprudent funds management/placement and undue reliance on volatile liabilities;
Insider abuse where directors, management and staff take substantial loans and enter into contracts which tend to be either highly inflated or dubious and fraudulent.
Fraudulent transactions initiated from without; and
Long period of economic recession which stifles business growth.
In Ghana, 2 major banks have been in distress and in both instances; the cause was excessive off-shore placements with parent company. The banks concerned were Banks of Credit and Commerce (Ghana) Limited and Meridien BIAO Bank (Ghana) Limited. The former is still under strict supervision by the central bank while the latter has been rehabilitated.
The following actions were taken by the central bank to manage the distress of Meridien BIAO Bank (Ghana) Limited (MBB).
Bank of Ghana assumed control of the business and closely supervised the management of MBB by attaching a team of examiners. A publication was made to this effect in the media in order to rekindle public confidence in the bank;
A new bank was incorporated that is the Trust Bank Limited (TBB) with capital of C10billion;
The central bank appointed the Trust Bank Limited as an agent to manage MBB.
A petition was presented to the High Court by the Bank of Ghana for the winding up of MBB and this was successful.
The Trust Bank Limited acquired the assets and liabilities of MBB and the deposits made initially by the two institutional shareholders were converted into equity holdings;
The Trust Bank conducted internal staff restructuring and this culminated in staff retrenchment and recruitment for key management positions.
Foreign strategic investors were invited to acquire shares in The Trust Bank and as result 4 foreign investors have subscribed to 56% of the equity of the bank. Banque Beglolaise S.A. of Belgium holds 35& of the equity and has control over the management of the bank.
The Trust Bank is now well organized and competing favourably with all banks in the industry.
The regulatory and supervisory framework involves prohibitions and restrictions on activities that could occasion abusive or highly risky actions. This also includes close supervisory oversight of banks’ operations and policy formulation functions. The regulatory provisions and supervisory steps are further supported by a wide range of enforcement powers consistent with depositors protection concern and the stability of the financial system.
Currently with the exceptions of two banks are on the watch list of the Bank of Ghana – one awaiting restructuring and the other hit by crisis transmitted from abroad, the generality of banks are safe and sound and the public, more than ever before, are willing to do business with the banks. The success is due primarily to the financial sector restructuring, the features of which included financial, institutional and management restructuring of banks, the institution of regulatory framework and improved quality of banks supervision.
No doubt, the vigilance of supervisors has contributed to sustaining the system and a solid foundation has been laid for a disciplined banking system capable of powering the economy into the next century.