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Essay: Banking regulatory & market framework of the Ghanaian economy

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Banking crises triggered development of regulations to safeguard the system. Domestic and international banking regulations were instituted and reformed over time to strengthen regulatory and supervisory frameworks since risky banking procedures were attributed to the financial crunches (Bertus, Jahera & Yost, 2007). Specifically, the crucial role of banks necessitated regulation and supervision of capital, risk management, provisions for liquidity, preconditions for loan and lease forfeitures, techniques for internal control, disclosure requirements and expertise of management staff amongst others (Abdallah, 2015, Murphy, 2015).

This paper examines the banking regulatory and market framework of the Ghanaian economy and employs SWOT analysis to scrutinise the system.

Discussion of the facts and issues

Ghanaian banking business begun in 1888 with the Post Office Savings Bank. The first commercial and foreign-owned bank, Bank of British West Africa, currently Standard Chartered Bank was established in 1896. The second commercial and foreign-owned bank, Barclays Bank was established in 1925. The central bank was established in 1953 to manage the Ghanaian currency but was later split into Bank of Ghana and Ghana Commercial Bank when the country attained independence in 1957. State-owned banks were later instituted by legislation to augment the provision of banking services (Akomea & Adusei, 2013; Osakunor, 2009).

Ghanaian banking system

Banks dominate the Ghanaian financial sector accounting for 85.1% of financial sector activities as at September 2016 (Ackah & Asiamah, 2014; BoG, 2016). There were 30 banks with 1,173 branch-network comprising of the central bank and 29 universal banks of which 15 are foreign-owned. There were 139 rural and community banks with ARB Apex Bank as the regulator. Bank of Ghana is vested with the supreme authority over bank and non-bank related issues to protect depositors and ensure an efficient banking system to stimulate growth (Abdallah, 2015). The banking system is governed by the following legislation:

i. Anti-Money Laundering Act 2008, Act 749
ii. ARB Apex Bank Limited Regulations 2006, L.I. 1825
iii. Banking Act 2004, Act 673
iv. Banking (Amendment) Act 2007, Act 738
v. Banks and Specialised Deposit-Taking Institutions Act 2015
vi. Bank of Ghana Act 2002, Act 612
vii. Bank of Ghana Notices/ Directives/ Circulars/ Regulations
viii. Borrowers and Lenders Act 2008, Act 773
ix. Companies’ Code 1963, Act 179
x. Credit Reporting Act 2007, Act 726
xi. Foreign Exchange Act 2006, Act 723
xii. Non-Bank Financial Institutions Act 2008, Act 774
xiii. Payment Systems Act 2003, Act 662

Legislative reforms

The Bank of Ghana Ordinance (No. 34) of 1957 established the central bank to primarily issue currency, administer monetary policies and be the fiscal agent and banker of the government (BoG, 2011; Gakpleazi, 2011). According to Mawutor (2014) and Osakunou (2009), Bank of Ghana Act 1963 (Act 182) was enacted to make provision for the lacuna in regulatory and supervisory role of the central bank which was not addressed by the Bank of Ghana Ordinance (No. 34) of 1957. The Act 182 was amended by the Bank of Ghana (Amendment) Act 1965 (Act 282). The first banking law, Act 339 was decreed in 1970 to amongst other provisions set the minimum capital and reserve requirements, institute the Chief Examiner of Banks and delineate allowable activities (Mensah, 2009).
The economy experienced difficulties that upset the banking system around 1983. Most banks were undercapitalised from rising inflation, increasing “crowding out” , inadequate banking supervision, non-existent foreign exchange reserves and rising non-performing loans (Antwi-Asare & Addison, 2000; Doe, 2012). With technical assistance from the International Monetary Fund, Ghana instituted two phases of an Economic Recovery Programme from 1984-1989 to restructure, develop and stabilise the economy. A more comprehensive Financial Sector Adjustment Programme (FINSAP) was initiated from 1988-2003 with assistance from the World Bank and governments of Japan and Switzerland. FINSAP comprised of restructuring institutions, improving the legal and regulatory context for banking operations and relaxing interest rates (Quartey & Afful-Mensah, 2014; Sowa, 2002).

As a sequel, Adjei-Frimpong (2013) documented the enactment of the second banking law, PNDC Law 255 in 1989 which paved the way for licensing several banks. The banking law stipulated prerequisites for minimum capital, capital adequacy, prudential lending and financial reporting. Subsequently, Bank of Ghana Law 1992 (PNDCL 291) was passed to annul the provisions of ACTs 182 and 282 and confer added supervisory authority on the central bank. Nonetheless, the economic challenges heightened around the 2000s and called for more stringent reforms and legislation to address the loopholes. Bank of Ghana Act 2002 (Act 612) was promulgated to further assert the independence of the central bank from governmental influence, maintain price stability and promote economic policies to enhance growth of the banking system (Appiah-Adu & Bawumia, 2016; Mawutor, 2014).

The universal banking concept was introduced in Ghana in 2003 to eliminate segmentation of banks, increase penetration and competition for capital mobilisation and create a level platform for banks. The minimum capital requirement was increased to GHS 7 million and banks were expected to achieve this by 2006. In the wake of the various reforms, the Banking Act 2004 repealed the Banking Act 1989 to merge existing banking laws, regulate banks and other associated issues (Adjei-Frimpong, 2013; BoG, 2007; IMF, 2011). The Banking Act 2004 was also amended as the Banking (Amendment) Act 2007 to permit the establishment of an International Financial Services Centre to boost the flow of foreign direct investment and income from foreign currency dominated fees. The Banking Act 2007 introduced the general banking license for universal and off-shore banking, Class I banking license for universal banking and Class II banking license for off-shore banking. The Ghanaian currency was redenominated in 2007 to equate 10,000 to one dollar. The minimum capital requirement for banks was further increased to GHS 60 million to engender competition and build the capacity of banks to engage in larger transactions. Foreign-owned banks had a two-year moratorium and local banks, a five-year moratorium to meet the requirement.

The Parliament of Ghana passed an amendment bill to the Bank of Ghana Act 2004 in August 2016. The 2016 Act is to plug loopholes in the 2004 Act, bring regulations at par with international best practices, fortify the autonomy of the central bank, introduce new qualifications and eliminate the influence of the Finance Minister in appointing board members. The country also entered into an IMF-supported Extended Credit Facility Programme in 2015 which specified zero-financing by the central bank to government as opposed to the 5% financing ceil passed by Parliament.

Analysis of the facts and issues

SWOT analysis is a business analysis technique or strategy formulation tool employed to evaluate the strengths of an entity in order to exploit opportunities for improvement, address weaknesses and mitigate threats to determine policies that will best align the competences and resources to achieve set goals (Al-Zoubi & Honotoria, 2007; Helms & Nixon, 2010; Ommani, 2011; Wang, 2007).
Al-Fayoumi and Abuzayed (2009) and Dhingra (2013) utilised SWOT analysis to assess the Jordanian banking sector and Indian public sector banks respectively. Lu and Yadong (2012) also employed SWOT analysis in the study of five rural banks in Heilongjiang province in China. Saravanan and Haneef (2011) used SWOT analysis as part of strategic planning process Non-Bank Financial companies in India.

Figure 1 below depicts a SWOT diagram of the Ghanaian banking system.


The systematic reforms and granting of universal licenses not only led to an influx of foreign and privately-owned banks but also liberalised the Ghanaian banking sector, expanded bank branches with expanding deposit-base and increased competition (Ackah & Asiamah, 2014; Akuffo-Duah, 2011; Bawumia & Asiamah, 2008; Opoku-Agyemang, 2015). The increasing competition over time resulted in provision of various products and services, increased cost efficiency, improved corporate governance, risk management and reduced cost of financial services (Denizer et. al., 2000; Boyd and Nicolo, 2005). The reforms also ensured stability in the banking system and deposit protection.

The Bank of Ghana Act 2004 empowers the central bank to enforce policies that inure to development of the banking industry and financial sector without governmental influence. Adopting the Basel Accords and International Financial Reporting Standards aids in stymieing systemic risk. Daske (2006), Hail, Leuz and Wysocki (2010) and Karamanou and Nishiotis (2009) discovered that adopting international reporting standards led to increased liquidity, decreased cost of equity capital, enhanced quality of accounting information and heightened disclosure.

The sector was comparatively shielded from a direct impact of the 2007 global financial meltdown partly due to minimal interconnectedness to global financial markets and dependence on low-cost internal funds (Ackah, Aryeetey & Aryeetey, 2009; Cobbinah & Okpalaobieri, 0000; Terrados, Almonacid & Honotoria, 2007). OECD (2010) provided and analogous assertion that Australian and Canadian banks depended largely on household deposits and resisted the financial crisis whereas the dependence on funds from financial markets by banks in the United Kingdom had adversarial consequences.

Some researchers including Abdel-Baki (2011), Dridi (2011), Magaldi and Maxfield (2012) and Ranganath and Rao (2010) attributed resilience to the 2007 financial crisis by some countries to sound regulation. Previous banking crisis and consequent reforms helped stave off the effect of the global financial downturn and Ghana is no exception.

Another forte is the high percentage of government and household funds leading to a well-capitalised, liquid and profitable system. Kumi, Amoamah and Winful (2013) documented the healthiness of Ghanaian banks with deposit mobilisation increasing by 120% between 2003 and 2007. Table one exhibits profitability and liquidity ratios of the Ghanaian banking sector.

Indicator 2012 2013 2014
Return on Equity 25.8 30.9 33.1
Return on Assets 4.8 6.2 6.6
Return on Earning Assets 6.5 8.1 8.7
Net Interest Margin 10.9 12.6 13.4
Liquid Assets to Total Assets 34.8 37.6 39.4
Liquid Assets to Total Deposits 50.1 58.3 62.5

Source: Bank of Ghana 2014 Annual Report.

The institution of risk-based supervision in conformity with the Basel Core Principles to monitor weaknesses and re-capitalisation has contributed to the stability of the system. The industry is well-capitalised with average capital adequacy ratio of 18% between 2010 and 2015 significantly above the 10% prudential and statutory requirement.


Notwithstanding the strides chalked by the Ghanaian banking sector, banking penetration still leaves much to be desired. Bawumia (2010) publicised the unbanked population as 70% and Wampah (2014) disclosed the unbanked population ratio as exceeding 80% with banking operations largely urbanised. Strategising to rope in more of the unbanked populace is also challenged by the low financial literacy rate. The rather low permeation of banks to the rural areas implies a significant unexploited segment to mobilise deposits and augment the profitability of the system.

Ackah and Asiamah (2014) documented that the high cost of credit, high lending rate and low credit availability to the private sector have bedevilled the sector. Lending rate averaged 28.51% from 2005 to 2016 having attained the highest of 42.84% in August 2016 and lowest of 21.24% in March 2008. High interest rate spreads averaged 23.01% between 2009 and 2014 as compared to a sub-Saharan average of 8.57% in 2012 (Adoah, 2015; Garr & Kyereboah, 2013; Mansah & Abor, 2013; tradingeconomics.com).
Ghanaian banks are challenged with balancing risk management and growth. Lack of structures to ascertain veracity of identification and credit history of borrowers exposes the industry to fraud. The policy to gather detailed customer information upon opening of accounts has not sufficed in forestalling banking fraud. Boateng, Boateng and Acquah (2014) asserted annual loss to bank fraud run into millions of Ghana cedis.


The establishment of foreign-owned banks into Ghanaian banking with the prerequisite to bring into Ghana 60% of initial capital in foreign convertible currency creates the platform for injection of foreign capital to stimulate economic development (Tetteh, 2014). Foreign-owned banks form approximately 52% of the total number of banks as at September 2016.

Incorporating technology in service delivery removes tailbacks of accessing banking services and offers a plethora of media such as internet and mobile banking, real-time settlement and ATMs for banks to innovate products and services and expand customer-base (Domeher, Frimpong & Appiah, 2014). Kumar (2011) recommended that businesses with a goal to revamp customer confidence ought to make innovating products to meet customer expectations a priority.

The Ghanaian government plans to recompense liabilities to the Bulk Distribution Companies which in turn borrowed funds from commercial banks contributing to the increasing non-performing loans of the industry. Reducing the exposure of banks to the energy and utility sector is expected to enrich the asset quality of the sector (BoG, 2016).

The discovery of oil in commercial quantities bestows vast operational and investment opportunities for Ghanaian banks (Mawutor, 2014; GBS, 2011).


Excessive competition from deregulation and universal banking practices can engender insolvency and instability of the industry as banks fall prey to moral hazard, information asymmetry and pursue riskier strategies to mobilise more deposits. World Bank (2014) indicated that with GDP of USD 38.62 billion and population of 26.79 million, Ghana could boast of 29 universal banks whereas Nigeria had GDP of USD 568.5 billion, population of 177.5 million and 22 universal banks. Beck (2008) and Claessens (2009) opined the necessity of restraining competition in the banking system in order to sustain stability since undue competition could result in vulnerability to systemic risk (Allen & Gale, 2004; Carletti & Hartmann, 2003).

The energy crisis that plagues Ghana adversely affects economic growth culminating in increasing operational costs, declining business income and profitability (Adom, 2011; Anane, 2015; Andersen & Dalgaard, 2012; CEPA, 2007). The 2012-2016 energy crisis contributed to decline in real GDP growth rate from 8.8% in 2012, 7.3% in 2013, 4% in 2014 to 3.9% in 2015. Banking industry operating assets dropped to 19% in 2015 from 38% in 2014 (Anane, 2015, PwC, 2016). Rising average inflation rates from 9.1% in 2012, 11.5% in 2013, 15.5% in 2014 to 17.1% in 2015 coupled with depreciation of the cedi and imbalances in other macroeconomic variables impede development of the banking sector. Athanasoglou, Brissimis and Delis (2005), Kosmidou, Pariouras and Tannz (2005), Kutsienyo (2011) and Sibindi and Bimba (2014) documented empirical evidence of GDP growth impacting positively on the banking sector and rising inflation adversely affecting banking sector growth. IMF (2011) reported the possibility of poor asset quality of Ghanaian banks should the macroeconomic imbalanced linger on.

The 70% growth on non-performing loans from 2015 to 2016 is undesirable for bank profitability, solvency and economic development (BoG, 2016, IMF, 2016). Baabereyir (2009) and Ngwa (2010) opined that credit risk is the most significant risk banks are susceptible to and Ghanaian banks are no exception.

Provision of mobile money services by telecommunication companies is viewed as a threat by 55.6% of Ghanaian banks in the 2016 banking survey. While mobile money balance on float grew 2,695 times from 2012 to 2015with transaction volume of 266.3 million, traditional bank deposits grew by 116% from GHS 19.6 billion to GHS 42.2 billion for the same period. Banks fear telecommunication companies are competitors instead of partners in the objective of financial inclusion (BoG, 2015; PwC, 2016).


Banks are indispensable to economic growth. Sound regulation and supervision of the banking industry is significant to nationwide development (Allen & Carletti, 2008; Singh, 2010).

Implementation of legislative and structural reforms repositioned the Ghanaian banking sector from bankruptcy, credit rationing, low financial intermediation, cash-dominated system and interest rate controls to a market-based system. Reforms strengthened the autonomy of the central bank to formulate strategies, enhanced competition, leading to a well-capitalised and profitable industry guided by home-grown and adoption of international best practices.

Leveraging on technology, proliferation of electronic banking services and products and the expectancy of banking sectors of developing countries surpassing those of developed countries, Ghanaian bank penetration is projected to increase to rope in the unbanked populace, address issues of high lending rates in order to mitigate the threats predisposed to the sector.


To harness the optimal potential for development, the central bank should enjoin banks and telecommunication companies to collaborate to help rope in the unbanked populace which has positive implications on fiscal stability and macroeconomic development (Mehrotra & Yetman, 2015; Burgess & Pande, 2005; Levine, 2005).


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