The Banking Sector January 2018

The Banking Sector January 2018

The banking sector has undoubtedly improved the Ghanaian economy since the first commercial bank was introduced in the late 1800’s. However, several Ghanaians began to ask questions as news outlets nationwide reported that Ghana Commercial Bank Limited (GCB Bank) had taken over UT Bank Ltd and Capital Bank Ltd on August 14 2017. This was a shock to not only their customers but the banking industry as a whole. Customers including myself vehemently denied these reports while some were comparing the news to the incident at DKM Diamond Microfinance Company Limited two years earlier. There was murmuring and chackling among customers who were later calmed when the central Bank of Ghana released a statement confirming its approval for the take over on the grounds that the banks severely impair their capital. The Bank of Ghana however assured the general public of a smooth transition process which would protects customer’s funds. This incident reduced the number of registered banks to thirty-four (34) while their number of branched networks nationwide stood at 1,483 as at the end of December 2017.

One would say such an unforeseen event may have a negative impact on the performance of banks in the country. This was however the opposite, the banking sector remained profitable and liquid as reported by the Financial Soundness Indicators in 2017. This improved performance was attributed to a positive growth in banks’ net operating income and income before tax. Despite this positive indicator, Non-Performing Loans (NPL) and banks’ asset quality continued to be a key risk in the industry as at December 2017.

The Central Bank of Ghana peg the minimum capital requirements for banks at Ghc 400 million in September 2017 Based on the Basel II/III recommendations. This move by the Central Bank has alerted universal banks to tighten their credit risk management practices so as to protect depositors’ funds. The Basel II/III is designed to help improve supervision and risk management within the banking industry and according the 2017 Ghana Banking Survey, all banks will be Basel II/III compliant by the end of 2018. Adopting the Basel II/III recommendations would help banks to safeguard against excessive borrowing and ensure liquidity during financial stress. All these policies by the Central Bank of Ghana would help create stronger banking institutions, improve credibility and augment the sector’s contribution to the economy going forward. Few months after the Central

Bank of Ghana’s announcement, Mr Ernest Addison (Governor of BoG) disclosed that five banks have met the new capital requirement even before the December 2018 deadline.

In a fierce competitive economy like Ghana, the most common cause of financial institutions’ failure is poor management. The unfortunate thing is that, there’s no reliable measure of poor management. Owing to this, this report presents an analysis of developmental indicators in the Ghanaian banking sector as at the end of December 2017.

Performance Indicators

Trend analysis of the number of licensed banks since 2004

The data presented above shows the number of licensed banks in Ghana for the period 2004-2017. In 2004, the Banking Sector comprised of twenty (20) licensed banks in 2004 and their performance was relatively stable and sound. A relatively stable macroeconomic environment in 2005 saw the introduction of the Banking Law, Act 673. ARB Apex Bank was licensed which increased the number of banks to twenty-one (21). Three new banks were licensed in 2006 increasing the total number of banks in the country to twenty-four (24).

The positive growth rate recorded in 2006 was visible in 2007 as banks continue to record positive significant growth. The Banking (Amendment) Act, 2007 (Act 738) was enacted, new categories of banking license were introduced: General Banking licence (for universal and off-shore banking): Class 1 Banking licence (for universal banking) and Class 2 Banking licence (for off-shore banking) and the first offshore banking operation was launched in September 2007 by Barclays Bank of Ghana Limited. The total number of banks however remained at twenty-three (23) having met the minimum capital requirement of GH￠7.0 million for universal banking business under Class I Banking licence. The Central Bank of Ghana roll-out the e-zwich biometric smart cards to support branchless banking and a strategy of promoting financial inclusion. BoG also created the Ghana Interbank Payment and Settlement System (GhIPSS) platform, implemented the Cheque Codeline Clearing (CCC) with cheque truncation as well as the establishment of an Automated Clearing House (ACH) commenced during the year. The implementation of these policies enhanced the environment for effective financial intermediation and banks in Ghana reported their financial position and performance for the year in accordance with the International Financial Reporting Standards (IFRS), the first in Ghana’s history. Two new banks were licensed which increased the number of Class 1 banks to twenty-five (24) with one operating on general banking license.

The industry experienced major developments as a result of the introduction of new processes of clearing cheques and other paper payment instruments in the previous year. The total number of Class 1 rose to twenty-six (26), one of them operating on general banking license. The minimum paid up capital requirement was revised to GH¢60 million in line with BoG’s directive. Only one foreign owned bank was able to meet the requirement capital. Ghanaian owned banks were given up to December 2012 to meet the recapitalised policy but are also required to meet Ghc25 million by 2010.

The electronic payment system continues to flourish in 2010 but the number of banks remained the same i.e. twenty-six (26). Ghanaian owned banks with the exception of two had met the minimum paid-up capital requirement of GH¢25.0 million as at the end of the year. The positive returns on assets the previous year continue to influence the performance of banks in 2011 as the industry remained solvent and profitable through out the year. The number of banks increased to twenty-seven (27) with the only bank operating on general banking reverted to a Class 1 bank. Just like 2011, the 2012 banking year remained solvent, liquid and profitable. The number of Class 1 licenced banks reduced from twenty-seven (27) to twenty-six (26) because merging which took place among Ecobank & The Trust Bank and Access Bank & Intercontinental Bank Ghana. The Banking industry remained liquid and profitable throughout 2013. The Banking Supervision Department (BSD) was established in August, all Class 1 banks in the country had signed up for credit reference services as at end December and had been submitting data to the credit reference bureaux. First Capital Plus was licenced which increased the number of banks to twenty-seven (27). The 2014 banking year was no different from the previous year as the industry remained stable and profitable. GN Bank Limited, which was formerly First National Savings & Loans Company Limited, acquired a Class 1 banking licence thus increasing the number of banks from twenty-seven (27) to twenty-eight (28).

Profitability marginally declined in 2015 due to an increase in non-performing assets. HFC Bank sold majority of its shares to the Republic Bank of Trinidad and Tobago hence making it a Foreign Owned Bank. One more bank was issued a Class 1 licence which increased the number of banks to twenty-nine (29). The 2016 banking year was confronted with difficult global and domestic conditions such as tight monetary policies and inflationary pressure posed challenges for the macro environment the banking industry.

The Central Bank of Ghana’s efforts to promote financial stability saw them collaborate with regional bodies, such as College of Supervisors of the West African Monetary Zone (CSWAMZ). Two new Acts namely: the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) and Ghana Deposit Protection Act, 2016 (Act 931) were introduced by BoG to ensure an appropriate and robust legal framework to deal with emerging risks and vulnerabilities in the financial system; and also help resolve challenges of failing financial institutions proactively. Four new banks were issued licence which increased the number of Class 1 banks in the country to thirty-three (33). The banking industry remained solvent through out the year 2017 despite the fact two universal banks were taken over by GCB Bank as a result of capital impairment. The number of Class 1 banks in the country stood at thirty-four (34).

Based on the discussion on the trend analysis of registered banks in Ghana, one would conclude that the banking sector has experienced a steady growth with respect to the number of registered banks in the country since 2004. The total number of licenced banks in Ghana averaged twenty-six in the past fourteen years.

Foreign-owned and indigenous banks in Ghana

Figure 1 below shows the proportion of foreign-owned and indigenous banks in Ghana as at December 2017

Prior to 2017, there were no licenced foreign banks in Ghana before 2005. The Central Bank of Ghana however introduced a new policy which allows only well-established foreign banks into the domestic banking system in 2006 and were allowed to establish branches to undertake Class II banking business in Ghana in 2007. In 2008, BoG classified all banks with 60% or more foreign ownership as foreign owned banks while the opposite holds for Ghanaian owned banks. As at the end of December 2009, one foreign owned bank met the new minimum paid up capital requirement of GH¢60 million introduced by BoG in 2008 while the number of Ghana owned banks was twenty-four (24). The number of foreign owned banks increased to thirteen (13) in 2010 whereas Ghana owned banks reduced from twenty-four (24) to thirteen (13) in the same year. The number of foreign banks increased from thirteen (13) to fifteen (15) in 2011 thereby overtaking the number of Ghanaian owned banks reduced to twelve (12). The number of foreign owned banks remained unchanged till 2015 when the number increased to seventeen (17) and the number ditto in 2016. Ghanaian owned banks reduced to eleven (11) in 2012 and were twelve (12) in 2013. One more Ghanaian owned bank was licensed in 2014 which increased their number to thirteen (13) while foreign owned banks increased from fifteen (15) to seventeen (17) in 2015, Ghanaian owned banks reduced to twelve (12). Foreign owned banks maintained their number in 2016 but Ghanaian owned banks increased to sixteen (16) the same year. Finally as at December 2017, the banking industry saw even distribution of foreign owned and Ghanaian owned banks. As presented in the pie chart above, we can see that the proportion of foreign owned banks and Ghanaian owned banks is evenly distributed at fifty (50) per cent.

The proportion of non-performing loans (NPL) in total credit granted by the banking sector 2004-2017