The Realities Of The Banking Industry In Ghana

The banking sector, obviously has seen remarkable transformation over the period. Pragmatic policies coupled with enabling environment, created by the Bank of Ghana and governments have had significance implication for the sector. Major reforms to the banking sector started in 1989 through the enactment of the banking law (PNDC Law 225). These reforms saw the emergence and the operations of a number of locally incorporated banks.

In line with the government of Ghana establishment of the Divestiture Implementation Committee to Implement and execute all government policies in respect of Divestiture Program, as set out in the divestiture of Interests(Implementation)Law,1993( PNDC Law 326), Government began to privatize some of the state owned banks and the liberalization of the financial sector.

This new policies led to the entry of a number of domestic and foreign banks into the banking industry. One of the expected benefit of financial liberalisation and the deepening of financial sector is the narrowing of the interest rate spreads i.e. the difference between the interest rate charge to borrowers and the rate paid to depositors.

This is predicted on the understanding that liberalisation enhances competition and efficiency in the financial sector, thus wide deposit-lending interest rates margin could be indicative of banking sector inefficiency or a reflection of the level of financial development (Folawewol and Tennant, 2008). Unfortunately the liberalisation could not yield the needed effects on the economy as lending rates were high with wider spread between deposit and lending rates indicating massive inefficiency in the banking sector so the need for more effective reforms.

To this end the liberalization of the financial sector under the Financial Sector Adjustment Programme (FINSAP) and Financial Sector Strategic Plan (FINSSIP) brought about healthy competition in the banking industry which reflected in improved deposit mobilization, increased savings and financial deepening.

The changing face of banking globally demanded that in 2004, government introduced a new Banking Act. The Banking Act, which has passed through parliament, also indicates that a bank shall at all times while in operation maintain a minimum capital adequacy ratio of ten per cent. The capital adequacy ratio shall be measured as a percentage of the adjusted capital base of the bank to its adjusted asset base in accordance with Regulations made by the Bank of Ghana.

The minimum capital requirement was initially increased to GHS 60 million in 2007 and then in 2013 it was increased to GHS 100 million. An increment in minimum capital requirement implies that the barrier of entering into and the door of exiting into the industry were made a lot stiffer. The net effect will be a reduction in the number of banks as well as increase the level of competition in the market.

It is however note worthy that, the level of competition in the Ghanaian banking sector has a rippling effect on the level of efficiency in the level of service delivery by banks in the country. The kind of competition in the banking sector has awakened the spirit of innovations in the banks which is seen in the provision of the state of the art automated teller machines (ATMs), e-banking, telephone banking, SMS banking etc. These innovations in technology have contributed largely to deepening banking services in Ghana.

Despite the gains made over the period there have been a number of backlash which needs to be mentioned.

1. Healthy competition within the banking industry should propel a downward trend in interest rates but rather there have been high interest rate spread suggesting high lending rates and low deposit rates.

2. Consumer expectations are not met on any given day. One major driving force in the banking industry under the current dispensation is the customer experience yet many banks are under pressure as they are unable to keep up with modern trends of service delivery as demanded by customers especially with regards to technology. Banks are therefore compelled to comply by spending a large part of their discretionary budget on building process and systems to keep up with the ever increasing demand and requirements.

3. However these regulatory pressures have brought about mergers, takeovers and liquidations in the financial market. A current takeover that took the market by surprise was the takeover of UT and Capital banks by the Ghana commercial bank which has sparked heated political, social and economic discourse in the country lately. This occurrence and the news that there are seven more banks currently struggling to meet minimum capital requirement has created uneasy calm among depositors who could storm banks to do panic withdrawals which could crush the banking industry. According to the Bank of Ghana, the collapse of the two banks, UT and Capital Banks was caused mainly by bad corporate governance and huge non-performing loans on their financials that made it very impossible for them to meet their day to day obligations as they fall due, hence they became INSOLVENT.

Reasons Why Banks Collapse in Ghana;
Any of the following facts could also have contributed to the collapse of UT and Capital banks in Ghana.

1. Most banks are unable to keep up with the increases in the minimum capital requirement to operate. The lack of capital adequacy can be attributed to; lack of financial control, poor working capital management, big projects and acquisitions, lack of marketing efforts, inappropriate financial policies of some banks.
2. Unguided corporate governance practice in banking institutions coming as result of autocratic rule, unbalanced/ineffective management team as result of missing knowledge, skills or attributes, overlaps of roles, unbalanced board (e.g. all accountants), lack of effective communication within the ranks and file, Ineffective/incompetent managers who are unable to think strategically.
3. Poor/bad adherence to credit policy and interference in credit delivery by to management/board and at times government for personal interest gains.
4. Loans not secured with the right collateral, since Ghana lacks a proper National Addressing and Asset Register which would help facilitate the recovery of loans, which ends up as bad debts. It is estimated that as at 25^th August, 2017 non recovery loans stood at 8 billion Ghana Cedis.
5. The inability of the banks to attract savings because interest paid or returns on savings and investments are very low hence the inability of the banks to attract the needed savings from customers.

Recommendations

1. To forestall the issue of panic withdrawals Bank of Ghana/government should, as a matter of urgency, start a campaign to allay the fears of depositors of the safety of their deposits at the various banks, otherwise there will be a massive increase in the unbanked population as most people are beginning to have massive confidence in Mobile Money transactions than the traditional banking system.
2. Minimal capital requirement should be doubled by the current amount. This will help the Bank of Ghana to identify banks with good financial standing to operate in the banking industry.
3. The Bank of Ghana must adhere strictly to the enforcement of the Banking Laws in Ghana. For instance why should Bank of Ghana not sanction UT bank since 2015 for not publishing its annual financial statement yet it was listed on the stock market? Heavy sanctions should be meted out to defaulting banks to serve as a deterrent to others.
4. The appointment of politicians as directors and board members of banks should immediately be discouraged by the Bank of Ghana.

Concluding Remarks
The major objective of the Bank of Ghana should be reducing the unbanked population considering the low nature of the banking population which stands at about 30% through efforts which seeks to restore confidence in Ghanaians and not the issuance of new license for operation. Even before any new licenses are issue due diligence should be made, even at the microfinance level, because anymore collapse of any financial institution where depositors lose their deposits like it was in the case of DKM will aggravate the already precarious situation and further erode the gains made so far.

Written by Dr. George Obeng
CEO of Nananom Financial Group
Toronto, Canada.