The Role Of Banks In The Ghanaian Economy
Money lending in one form or the other has evolved along with the history of mankind. Even in the bible, there are references to moneylenders. Shakespeare also referred to ‘Shylocks’ who made unreasonable demands in case the loans were not repaid in time, along with interest.
Ghana’s history is also filled with instances where indigenous money lenders had mortgaged the landed property or anything of value of the borrowers.
In the post independence period, extensive government intervention characterised the financial sector. Basically, all of the banks set up between the early 1960s and the late 1970s were wholly or majority owned by the public sector, while the government also acquired minority shares in the two already established foreign banks in the mid-1970s.
Prior to the economic and financial sector reforms, interest rates were administratively controlled by the Bank of Ghana (BOG) and a variety of controls were also imposed on the asset allocations of the banks, such as sectoral credit directives.
The motivation for these policies was the belief that because of market imperfections and the nature of the financial system inherited from the colonial period, the desired pattern of investment could not be supported without extensive government intervention in financial markets.
Basically, policies were motivated by three objectives: to raise the level of investment and quicken the pace of development, to change the sectoral pattern of investment, and to keep interest rates both low and stable (Gockel, 1995, p117).
Financial sector policies were characterised by severe financial repression, real interest rates were steeply negative and most of the credit was channelled to the public sector.
To fill the perceived gaps not served by the commercial banks, especially for long-term finance, three development finance institutions (DFIs) were set up: the National Investment Bank (NIB) in 1963 to provide long-term finance for industry; the Agricultural Development Bank (ADB) in 1965; and the Bank for Housing and Construction (BHC) in 1974, to provide loans for housing, industrial construction and companies producing building materials.
The DFIs mobilised funds from deposits as well as from government and foreign loans and undertook commercial banking activities as well as development banking.
The government did not nationalise the two foreign owned banks—Barclays Bank and Standard Chartered Bank (SCB)—which had been established in Ghana during the colonial period, but it did acquire 40 per cent equity stakes in the banks following an indigenisation decree enacted in 1975 (which was applied to all large scale industries).
However, after many decades of government domination of the banking sector, some problems became paramount. The service standards of the public sector banks began to decline. Their profitability declined and the efficiency of the staff became suspect. Non-performing assets of these banks began to rise.
In the early 1980s, as part of the structural and economic reforms and financial sector liberalisation, the government allowed the setting up of new banks in the private sector. The new generation private banks have now established themselves in the system and have set new standards of service and efficiency. These banks have also given tough but healthy competition to the remaining public sector banks.
The modern economies in the world have developed primarily by making the best use of the credit availability in their systems. Therefore, an efficient banking system must meet the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors.
Unfortunately, even though the number of banks in Ghana has increased significantly, their capital size does not allow them to lend to big ticket projects. Big ticket projects must be wholly or mostly financed by foreign banks.
On the other hand, the medium and small enterprises whose credit needs for expansion and working capital needs are not as huge can be adequately met by these new private banks. An important point to note is that the rural sector in a country like Ghana can grow only if cheaper credit (sub sized credits ) is available to farmers for their short and medium term needs. This was one of the major reasons why governments, in the past, directed credits to that sector.
The banks and the financial institutions also cater to another important need of the society i.e. mopping up small savings at reasonable rates with several options.
The common man has the option to park his savings under a few alternatives, including the small savings schemes in the form of savings accounts and time deposits. Another option is to invest in the stocks or mutual funds.
In addition to the above traditional role, the banks and the financial institutions also perform certain new-age functions which could not be thought of a couple of decades ago. The facility of internet banking enables a consumer to access and operate his bank account without actually visiting the bank premises.
ATMs and the credit/debit cards have revolutionised the choices available for the customers.
The banks also serve as alternative gateways for making payments on account of income tax and online payment of various bills like the telephone, electricity and tax. The bank customers can also invest their funds in various stocks or mutual funds straight from their bank accounts.
In a modern day economy where people have no time to make these payments by standing in queues, the service provided by the banks is commendable.
While the commercial banks cater to the banking needs of the people in the cities and towns, there is another category of banks that looks after the credit and banking needs of the people living in the rural areas, particularly the farmers.
Rural banks (micro finance institutions) have been sponsored by many commercial banks. These banks take care of the farmer-specific needs of credit and other banking facilities.
Banks today are free to determine their interest rates within the given limits prescribed by the central bank. It is now easier for banks to open new branches.
But the banking sector reforms are still not complete. A lot more is required to be done to revamp the public sector banks. Mergers and consolidation is the next measure on the agenda of the government.
The government is also preparing to disinvest some of its equity from the public banks (NIB, and ADB). The option of allowing foreign strategic investor in the two public banks is under consideration.
The writer is an economic consultant and former Assistant Professor of Finance and Economics at Alabama State University, Montgomery, Alabama.
rockvile2009@yahoo.com