## _cr03396

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### I. Summary of findings and recommended actions
- Progress since the FSAP has been limited—the financial sector remains underdeveloped and services only a small portion of the population.
- Authorities have drafted an impressive list of new legislative bills to modernize financial sector regulation, but slow passage hampers enforcement of prudential regulations.
- Main vulnerabilities:
  - Banking system: exposure of one large systemically important bank to the Tema Oil Refinery (TOR) and a high level of past-due loans.
  - SSNIT: weak governance, past poor investment performance, and continued government interference in funding and investment decisions.
- Potential effects of a successful government economic program:
  - Continued decline in interest rates could compress bank profit margins and make it harder for banks to carry large stocks of past-due loans.
  - Expansion of bank lending to the private sector would increase the need for prudent credit-risk management by banks and supervisors.
- Development challenges:
  - Weak competition in the banking sector.
  - Obstacles to expanding lending to SMEs and providing more housing finance.
  - Suspension of planned divestiture of Ghana Commercial Bank (GCB) due to public concern about foreign domination.
  - Undeveloped insurance industry and financial markets; limited intermediation of medium– to long–term funds.
- Suggested actions to develop the financial sector:
  - Improve corporate governance and financial reporting for Ghanaian firms.
  - Introduce a suitable legal framework to facilitate credit reference bureaus.
  - Address inadequacies in property titles and weak judicial enforcement of foreclosure processes.
  - Ensure timely payment of the government’s obligations.
- AML/CFT:
  - Authorities encouraged to seek further technical assistance.
  - Staff encouraged passage of the Money Laundering Bill and seeking IMF or World Bank assistance to develop needed infrastructure.

### II. Progress in implementing key FSAP recommendations (selected)
- Banking supervision
  - Recommendation: Reduce exposures of the two banks that still had claims on TOR to within prudential limits.
    - Progress Achieved: Most TOR exposures converted into government securities in 2001 and 2002. However, on-balance sheet exposures for one large bank tripled in the first eight months of 2003 and are now well in excess of that bank’s capital. That bank also has large and growing off-balance sheet exposures to TOR.
  - Recommendation: Review banks’ risk management approaches, and take remedial actions as needed.
    - Progress Achieved: Risk management approaches reviewed, and three banks closed in 2000. However, enforcement of prudential regulations continues to be weak.
- Insurance supervision
  - Recommendation: Introduce updated insurance legislation, reinforcing powers of the National Insurance Commission.
    - Progress Achieved: New legislation has been drafted.
  - Recommendation: Strengthen supervisory practices: inspection powers; prudential reporting; mechanisms to liquidate weak insurance companies.
    - Progress Achieved: Five insolvent companies closed despite out-of-date legislation. A task force was established in 2003 to improve prudential reporting and conduct regular on-site inspections.
- Pension system
  - Recommendation: Continue efforts to reform SSNIT: develop clear written investment policies; improve governance; improve audited financial statement procedures using transparent valuation, provision, and income recognition standards.
    - Progress Achieved: Appointment of a new Board and a new director has helped bolster SSNIT’s independence. However, the government continues to interfere in its funding arrangements. Investment policies and auditing procedures still need to be improved.
- Securities regulation
  - Recommendation: Fully implement recently adopted securities legislation.
    - Progress Achieved: Done.
  - Recommendation: Concentrate oversight of all securities activities, including in treasury bills, in the SEC.
    - Progress Achieved: SEC still lacks authority over government securities.
  - Recommendation: Introduce higher capital requirements and position and foreign exchange exposure limits for securities companies.
    - Progress Achieved: Done.
- Bank of Ghana
  - Reinforce independence and focus on key responsibilities: Done.
  - Set schedule for withdrawing from developmental policy and commercial financial activities: Done.
  - Reinforce transparency of financial reporting and independence and quality of its audit: Significant progress achieved.
  - Separate debt management from liquidity management and develop a debt management strategy: Technical support being provided by USAID to help the Ministry of Finance establish a debt management office and introduce a more formal borrowing strategy.
  - Strengthen the Bank of Ghana’s capital by replacing government receivables with treasury bills and longer-term government securities: Done, except for shares in Ghana International Bank (London).
  - Liquidate its ownership in banks: No change.

### III. Macroeconomic environment and implications for the financial sector
- Context and recent macro developments:
  - Inflation: 42 percent in March 2001 → 21 percent by end-2001 → 15 percent at end-2002.
  - Cedi depreciated by almost 15 percent against the U.S. dollar during 2002, broadly in line with inflation.
  - Gross international reserves recovered to nearly two months of imports despite shortfall in donor financing.
  - Real GDP growth in 2002: estimated 4.5 percent.
  - Real growth in credit to the private sector: 12 percent in 2001 → 18 percent in 2002.
- Slippages late-2002 / early-2003 led to renewed inflation pressures:
  - Inflation: 30 percent in April 2003 → prompted central bank to raise prime interest rate twice by a total of 3 percentage points (to 27.5 percent).
  - Inflation subsequently declined to 28 percent in August 2003.
- Effects on financial sector development:
  - High uncertainty and history of expansionary fiscal policy discourage medium- to long-term commitments.
  - Markets for medium- to long-term debt and equity are highly underdeveloped.
  - Government difficulty finding investors for treasury bills with maturities in excess of 91 days.
  - Banks attracted to low-risk high-yielding short-term assets (treasury bills), eroding credit-risk management and reducing incentives to invest in SME lending infrastructure.
- Potential turning point if reforms succeed:
  - If government eliminates net domestic borrowing requirements in the year and brings inflation to single digits by early-2004, vulnerabilities would persist due to a narrow economic base and contingent liabilities from weak SSNIT.
  - Positive fiscal developments in 2003 led to decline in government borrowing requirements, oversubscriptions of auctions, and a sharp fall in nominal interest rates—further declines could stimulate private-sector credit demand and require stronger risk management.

### IV. Key economic and financial indicators (selected, 1997–2002, end-of-period unless specified)
- Real GDP growth: 4.2 (1997), 4.7 (1998), 4.4 (1999), 3.7 (2000), 4.2 (2001), 4.5 (2002)
- GDP (in billions of cedis): 14,113 (1997), 17,296 (1998), 20,580 (1999), 27,153 (2000), 38,071 (2001), 48,862 (2002)
- Inflation rate: 27.9 (1997), 14.6 (1998), 12.4 (1999), 25.2 (2000), 32.9 (2001), 14.8 (2002)
- Broad money (M3) (excluding foreign currency deposits) growth: 44.3 (1997), 20.2 (1998), 19.8 (1999), 33.4 (2000), 48.4 (2001), 50.0 (2002)
- Net domestic assets (in percent of broad money at the beginning of the period): 33.2 (1997), 15.9 (1998), 46.0 (1999), 49.1 (2000), 13.5 (2001), 13.7 (2002)
- Credit to government (in percent of broad money at the beginning of the period): 23.2 (1997), 49.9 (1998), 38.2 (1999), 57.7 (2000), 0.0 (2001), 30.0 (2002)
- Credit to the private sector (deposit money banks to private sector): 24.9 (1999), 34.4 (2000), 12.0 (2001), 17.7 (2002)
- Yield on government bills (in percent): 45.7 (1997), 28.7 (1998), 34.2 (1999), 42.0 (2000), 28.9 (2001), 28.1 (2002)
- Central government financial balance (in percent of GDP): -10.3 (1997), -8.1 (1998), -8.2 (1999), -7.9 (2000), -7.7 (2001), -5.0 (2002)
- Total outstanding public debt (in percent of GDP): 76.3 (1997), 74.6 (1998), 73.7 (1999), 116.7 (2000), 116.1 (2001), 95.6 (2002)
- Gross international reserves (in millions of U.S. dollars): 480 (1997), 550 (1998), 317 (1999), 264 (2000), 344 (2001), 635 (2002)
- Reserves in months of imports of goods and services: 1.6 (1997), 1.9 (1998), 1.0 (1999), 0.9 (2000), 1.2 (2001), 2.0 (2002)

### V. Banking system vulnerabilities and structure
- TOR exposure and a single systemically important bank:
  - TOR short-term debt was restructured into medium-term government bonds in 2001 and 2002.
  - TOR began borrowing again from one large bank due to government delays in implementing petroleum price increases.
  - That bank’s on-balance sheet exposure to TOR exceeded 150 percent of its capital in August 2003.
  - The bank also has large off-balance sheet exposures to TOR in letters-of-credit.
  - If the government implements pricing reforms to ensure full cost recovery in energy, electricity, and water sectors, TOR should be better positioned to service debts.
- Past-due loans:
  - Past-due loans (OLEMs and NPLs) climbed from 16 percent of total loans at FSAP to an eight-year high of 28 percent in 2001 and 2002.
  - Past-due loans began to decline in H1 2003 and were less than 26 percent in June 2003.
  - High inflation, rapid cedi depreciation, and interest rate hikes in early-2001 adversely affected small and medium-sized borrowers.
- Financial soundness indicators (selected, 1997–2002)
  - Regulatory capital to risk-weighted assets: 15.2 (1997); 11.1 (1998); 11.5 (1999); 11.6 (2000); 14.7 (2001); 13.4 (2002)
  - Past-due loans to gross loans: 24.6 (1997); 18.9 (1998); 20.1 (1999); 16.2 (2000); 28.0 (2001); 28.6 (2002)
  - Non-performing loans: 21.6 (1997); 17.2 (1998); 12.8 (1999); 11.9 (2000); 19.6 (2001); 22.7 (2002)
  - Provisions as percent of past-due loans: 78.0 (1997); 89.4 (1998); 67.2 (1999); 58.6 (2000); 46.4 (2001); 63.6 (2002)
  - Return on assets (before-tax net income to average assets): n.a. (1997); 8.8 (1998); 8.5 (1999); 9.8 (2000); 8.7 (2001); 6.7 (2002)
  - Liquid assets/total assets: 57.8 (1997); 57.8 (1998); 53.4 (1999); 48.4 (2000); 42.7 (2001); 50.8 (2002)
  - Loan/deposit: 42.2 (1997); 48.7 (1998); 59.0 (1999); 64.0 (2000); 63.9 (2001); 50.1 (2002)
- Bank supervision and smaller banks:
  - Two small domestic commercial banks failed to meet minimum capital adequacy in 2002; supervisors restricted lending and requested new capital injections. Their market shares and interbank borrowings are small.
- Stress test scenarios and results:
  - Scenario 1: 20 percent of current loans migrate to past due in 90 days; loans remain nonperforming thereafter; migration schedule to sub-standard, doubtful, loss over 360 days.
  - Scenario 2: provisioning rates of 50 percent against OLEMs and 100 percent against all NPLs.
  - Scenario 3: redeploying 50 percent of each bank’s securities portfolio into loans of the same quality and provisioning requirements as existing loan portfolio (excluding government bonds issued in exchange for TOR loans).
  - Scenario 1 implied total OLEMs and NPLs would increase by 15 percentage points to 43 percent of total loans 180 days after the shock.
  - Scenario 3 would reduce the banking system’s capital adequacy ratio to 11 percent.
  - Results (FSAP Update, December 2002):
    - Banking system capital adequacy: initial 13.4; After 90 days (Scenario 1) 10.9; After 180 days (Scenario 1) 7.2; Scenario 2 result 9.0; Scenario 3 result 10.8.
    - Number of banks below 6 percent (share of total banking system capital in parentheses): initial 2 (5.6); After 90 days (Scenario 1) 6 (29.0); After 180 days (Scenario 1) 12 (63.8); Scenario 2: 7 (31.4); Scenario 3: 5 (28.0).
    - Number of banks below zero (share of total banking system capital in parentheses): initial 1 (5.6); After 90 days (Scenario 1) 4 (7.1); After 180 days (Scenario 1) 6 (10.4); Scenario 2: 5 (8.1); Scenario 3: 2 (5.8).
  - Caution: initial OLEMs and NPLs used in March 2000 stress tests were 16 percent versus 28 percent in December 2002, increasing vulnerability to new shocks.
- Interest rate and exchange rate sensitivity:
  - Moderate interest rate changes have limited impact on profits due to modest maturity gaps; declining interest rates and deposit rates approaching zero will make preserving wide spreads harder.
  - FX position limit: aggregate foreign currency open positions limited to 30 percent of net own funds; implies maximum loss (gain) of 3 percent of primary capital for every 10 percent depreciation in cedis depending on net positions.
  - At end-December 2002, five banks exceeded the limit by 1.3–18.7 percentage points.
  - All banks, except two small banks, showed net long foreign currency positions and would profit from further cedi depreciation directly; indirect adverse effects could arise via borrower deterioration.

### VI. Banking system structure, competition, and SME/housing finance
- Banking system concentration and outreach:
  - Dominated by the state-owned GCB and three foreign-owned commercial banks; these banks account for about two-thirds of system assets and deposits.
  - Foreign-owned banks account for about 55 percent of system assets (40 percent foreign-owned commercial banks; foreign-owned development and merchant banks an additional 15 percent).
  - Banks reach about 5 percent of households.
- Competition and profitability:
  - Competition appears weak; high overhead costs.
  - Pre-tax returns on assets and equity among highest in sub-Saharan Africa due to very wide interest margins. Margins have narrowed since the FSAP as interest rates trended down.
- GCB divestiture:
  - Planned divestiture suspended amid public concern about foreign domination.
  - Interim proposals: raise new share capital for GCB; competitively tender a management contract; authorities to develop details by end of year and aim to announce in 2004 budget statement.
- SME access to finance:
  - Key obstacles: inadequate collateral, insufficient credit track records, weak property titles, weak judicial foreclosure enforcement.
  - Urgent policy actions:
    - Ensure timely payment of government obligations to SMEs.
    - Improve corporate governance and financial reporting for Ghanaian firms.
    - Introduce legal framework for credit reference bureaus.
    - Address policy, legal, regulatory, and institutional bottlenecks for SMEs.
  - Longer-term measures:
    - Introduce efficient payment instruments (common ATM/POS platforms, credit/debit cards).
    - Attract investment from internationally-connected Ghanaians and high-growth entrepreneurs.
- Housing finance:
  - Most lenders avoid housing finance; Home Finance Company (HFC) is practically the only mortgage supplier.
  - Constraints: unattractive macro environment, weak property title system, inefficient foreclosure processes, weak institutional arrangements among land agencies.
  - Recommendations:
    - Extend HFC’s favorable legal framework to other potential mortgage lenders.
    - Reduce import duties on construction goods.

### VII. Insurance, securities markets, public debt management, and market infrastructure
- Insurance industry:
  - Primarily short-term property and casualty business.
  - Insurance premiums as percent of GDP: less than one percent in 2001.
  - Insurance company assets represent about 1½ percent of total financial sector; less than 10 percent of premiums are for life insurance.
  - Of 18 companies operating: 8 insolvent; 5 others weak and asked to prepare action plans.
  - Market dominated by State Insurance Company (SIC); state-owned reinsurer Ghana-Re retains protected market.
  - Recommendation: introduce planned insurance industry training center to improve skills and public awareness.
- Securities and capital markets:
  - Financial markets are at early stage; limited trading on Ghana Stock Exchange (GSE) and government securities markets.
  - Suggested measures to deepen markets:
    - Improve corporate financial reporting and governance.
    - Rationalize tax treatment of investment income.
    - Increase divestitures of SOEs through GSE where appropriate.
    - Pursue closer cooperation between GSE, Nigerian Stock Exchange, and Bourse régionale de valeurs mobilières.
    - Further liberalize ceilings on foreign portfolio investment conditional on macro and supervisory improvements.
  - Market infrastructure recommendations:
    - Support GSE demutualization to raise capital for trading systems.
    - Thorough cost-benefit assessment of a proposed central depository with dematerialized securities.
- Public debt management:
  - Past large domestic borrowing requirements led to undersubscription and concentration in 91-day treasury bills.
  - Continued fiscal consolidation expected to lengthen debt maturity.
  - Very recent decline in borrowing requirements led to oversubscription of recent auctions.
  - Sovereign rating: August 2003 Ghana received a B+ (stable) credit rating from Standard & Poor’s.
- AML/CFT:
  - Lack of AML/CFT legislation risks domestic system abuse and international reputation.
  - FSAP update did not include an AML/CFT assessment.
  - IMF and World Bank stand ready to provide technical assistance on request.
  - Ghana preparing for an AML/CFT assessment under FATF-endorsed methodology as member of regional FATF-style body for West Africa.

### VIII. Legal, regulatory and supervisory framework; international standards observance
- Draft and recently enacted laws:
  - New Bank of Ghana Act and Securities Industry Amendment Act passed since FSAP.
  - Draft bills include: (i) Banking Bill; (ii) Payments Systems Bill; (iii) Bills and Checks Bill; (iv) Money Laundering Bill; (v) Offshore Banking Bill; (vi) Foreign Exchange Bill; (vii) Credit Union Bill; (viii) Insurance Bill.
  - Legislative status: Banking and Payments Systems Bills before parliament; Bills and Checks Bill with Justice Department; Money Laundering Bill completed by Bank of Ghana and to be sent to attorney general then parliament. Authorities believe four bills can be enacted this year; remaining four expected to be introduced in 2004.
- Bank of Ghana modernization:
  - Capacity building program; use of computer audit procedures; streamlined Report of Examination; stricter licensing procedures.
  - Enforcement remains weak; examples of banks operating with negative capital and rural banks below capital minima.
  - Banking Bill, once enacted, would enable new capital adequacy, loan classification, provisioning aligned with international practices, and consolidated supervision.
- Observance updates:
  - Basel Core Principles: FSAP found high degree of compliance but noted supervisory reliance on moral suasion and legal constraints; Banking Bill and Money Laundering Bill expected to address some gaps; memorandums of understanding with foreign supervisors still outstanding.
  - IAIS Insurance Principles: FSAP found weak observance; factual update largely unchanged due to staffing and legislative constraints; mid-2003 taskforce established for inspections and quarterly reporting.
  - IOSCO Securities Principles: FSAP found high degree of observance with shortfalls; SEC 2003 Regulations in place; SIAA passed end of 2000; gaps remain (financial dependence on ministry, limited cooperation with foreign regulators, exclusion of government securities from SEC purview, token fines, limited AML controls in broker-dealer accounts).
- Market risk supervision:
  - Need to increase Bank of Ghana capacity to supervise market risks ahead of expected introduction of an interbank foreign exchange market in 2004.
  - Examination Manual review found limited guidance on foreign exchange, back-office trading, and securities investments.

### IX. Monetary policy framework and Bank of Ghana
- Central bank law and governance:
  - New Central Bank Law effective January 2002: guarantees independence; confirms price stability as primary objective; creates Monetary Policy Committee meeting every second month.
  - Bank accounting and auditing practices significantly improved; July 2003 IMF Safeguards Assessment noted remaining financial control weaknesses.
  - Bank of Ghana continues to hold shares in Ghana International Bank (London); divesting would bolster independence.
- Monetary instruments:
  - March 2002: established a “prime” central bank interest rate as overnight repo facility rate; borrowings collateralized by treasury bills.
  - Late-2002: reverse repo restructured to 7- or 14-day facility with rates set at prime less 1 percent.
- Recapitalization:
  - No progress in recapitalizing Bank of Ghana.
  - FSAP recommendation: replace non-marketable government claims with negotiable securities and increase capital from GC 100 billion to GC 500 billion.
  - Government preoccupied with TOR restructuring; recapitalization need may increase as the bank absorbs debt service cost for liquidity-management securities.
- Technical assistance:
  - IMF: foreign exchange, domestic debt market and central bank accounting assistance.
  - World Bank: banking and NBFI regulation and supervision, insurance regulation and supervision, capital markets regulation, social security reform support.
  - FIRST Initiative to support launch of interbank FX market in 2004.
  - World Bank to provide ongoing support on GCB policy and social security reform.
- Financial sector aggregates (December 2002):
  - Bank assets-to-GDP ratio: 39 percent at end-2002.
  - Rural banks and other NBFIs: 5 percent of GDP in 2002.
  - M2 as share of GDP: 19 percent in 2002.
  - Currency in circulation: 8 percent of GDP.
- Financial sector structure (selected entries, December 2002):
  - Commercial banks (sub-total): Number of institutions 17; Branches 309; Assets (Billions of cedi) 18,668; (% of Sub-total) 100.0; (% of GDP) 39.1
    - Large commercial banks: 4; Branches 217; Assets (Billions of cedi) 12,058; (% of Sub-total) 64.6; (% of GDP) 25.2
      - Ghana Commercial Bank (GCB): 1; Branches 134; Assets (Billions of cedi) 4,624; (% of Sub-total) 24.8; (% of GDP) 9.7
      - Foreign-owned banks: 3; Branches 83; Assets (Billions of cedi) 7,434; (% of Sub-total) 39.8; (% of GDP) 15.6
    - Small commercial banks: 5; Branches 12; Assets (Billions of cedi) 997; (% of Sub-total) 5.3; (% of GDP) 2.1
  - Development banks: 3; Branches 62; Assets (Billions of cedi) 2,738; (% of Sub-total) 14.7; (% of GDP) 5.7
  - Merchant banks: 5; Branches 18; Assets (Billions of cedi) 2,875; (% of Sub-total) 15.4; (% of GDP) 6.0
  - Rural banks: Number of institutions 115; Branches 353; Assets (Billions of cedi) 864; (% of Sub-total) 100.0; (% of GDP) 1.8
  - Insurance companies (2001 data) — Sub-total: Number of institutions 21; Assets (Billions of cedi) 4,596; (% of Sub-total) 100.0; (% of GDP) 9.6
    - Social Security and National Insurance Trust: 1; Branches 45; Assets (Billions of cedi) 3,873; (% of Sub-total) 84.3; (% of GDP) 8.1
  - Other nonbank financial institutions — Sub-total: Number of institutions 286; Assets (Billions of cedi) 1,531; (% of Sub-total) 100.0; (% of GDP) 3.2
  - Total financial sector: 439 institutions; Assets (Billions of cedi) 25,659; (% of GDP) 53.7

*Source: IMF/World Bank FSAP update mission findings and Ghana Financial System Stability Assessment materials contained in the source chapter.*

### 1. Progress in Implementing Key FSAP Recommendations........................................................... 5

### 1. Progress in Implementing Key FSAP Recommendations........................................................... 5

### I. SUMMARY OF FINDINGS
- Progress since the FSAP has been limited—the financial sector continues to be underdeveloped and only services a small portion of the population.
- Authorities have drafted an impressive list of new legislative bills to provide a more modern framework for financial sector regulation, but progress has been slow, hampering tighter enforcement of prudential regulations in the banking system.
- Main vulnerabilities:
  - Banking system: exposure of one large systemically important bank to the Tema Oil Refinery (TOR) and a high level of past-due loans.
  - SSNIT (Social Security National Insurance Trust): weak governance arrangements, past poor investment performance, and continued government interference in funding and investment decisions that could further undermine its weak financial position.
- Potential effects of a successful government economic program:
  - If interest rates continue to decline, bank profit margins may come under pressure, making it more difficult for banks to carry their large stock of past-due loans.
  - Expansion of bank lending to the private sector could increase the need for prudent credit-risk management by banks and supervisors.
- Development challenges:
  - Weak competition in the banking sector.
  - Obstacles to expanding lending to small- and medium-sized enterprises (SMEs) and providing more housing finance.
  - Suspension of planned divestiture of Ghana Commercial Bank (GCB) due to public concern about potential foreign domination of Ghana’s banking sector.
  - Undeveloped insurance industry and financial markets; limited role in intermediating medium– to long–term funds.
- Suggested actions to develop the financial sector (given importance of financing for SMEs):
  - Improve corporate governance and financial reporting for Ghanaian firms.
  - Introduce a suitable legal framework to facilitate operation of credit reference bureaus.
  - Address inadequacies in property titles and weak judicial enforcement of foreclosure processes.
  - Ensure timely payment of the government’s obligations.
- Progress in observance of international standards and codes:
  - Most evident in securities regulation: SEC has continued to update regulations after passage of the SIAA in 2000.
  - More limited progress in banking and insurance supervision, partly reflecting delays in drafting and passage of new legislation.
- AML/CFT:
  - Authorities were encouraged to seek further technical assistance.
  - Staff encouraged passage of the Money Laundering Bill and seeking IMF or World Bank assistance to develop needed infrastructure.

### Table: Progress in Implementing Key FSAP Recommendations (summary of principal recommendations and progress achieved)
- Banking supervision
  - Recommendation: Reduce exposures of the two banks that still had claims on TOR to within prudential limits.
    - Progress Achieved: Most TOR exposures converted into government securities in 2001 and 2002. However, on-balance sheet exposures for one large bank tripled in the first eight months of 2003 and are now well in excess of that bank’s capital. That bank also has large and growing off-balance sheet exposures to TOR.
  - Recommendation: Review banks’ risk management approaches, and take remedial actions as needed.
    - Progress Achieved: Risk management approaches reviewed, and three banks closed in 2000. However, enforcement of prudential regulations continues to be weak.
- Insurance supervision
  - Recommendation: Introduce updated insurance legislation, reinforcing powers of the National Insurance Commission.
    - Progress Achieved: New legislation has been drafted.
  - Recommendation: Strengthen supervisory practices: inspection powers; prudential reporting; mechanisms to liquidate weak insurance companies.
    - Progress Achieved: Five insolvent companies closed despite out-of-date legislation. A task force was established in 2003 to improve prudential reporting and conduct regular on-site inspections.
- Pension system
  - Recommendation: Continue efforts to reform SSNIT: develop clear written investment policies; improve governance; improve audited financial statement procedures using transparent valuation, provision, and income recognition standards.
    - Progress Achieved: Appointment of a new Board and a new director has helped bolster SSNIT’s independence. However, the government continues to interfere in its funding arrangements. Investment policies and auditing procedures still need to be improved.
- Securities regulation
  - Recommendation: Fully implement recently adopted securities legislation.
    - Progress Achieved: Done.
  - Recommendation: Concentrate oversight of all securities activities, including in treasury bills, in the SEC.
    - Progress Achieved: SEC still lacks authority over government securities.
  - Recommendation: Introduce higher capital requirements and position and foreign exchange exposure limits for securities companies.
    - Progress Achieved: Done.
- Legal and judicial system
  - Recommendation: Introduce a strong legislative framework against money laundering.
    - Progress Achieved: Legislation has been drafted.
  - Recommendation: Improve effectiveness of rules on contract enforcement, security, and collateral foreclosure, and court procedure effectiveness.
    - Progress Achieved: No change.
- Bank of Ghana
  - Recommendations and progress:
    - Reinforce independence of the Bank of Ghana in the new central bank law: Done.
    - Reinforce focus on key central bank responsibilities: Done.
    - Set schedule for withdrawing from developmental policy and commercial financial activities: Done.
    - Reinforce transparency of financial reporting and independence and quality of its audit: Significant progress achieved.
    - Separate debt management from liquidity management, and develop a debt management strategy: Technical support being provided by USAID to help the Ministry of Finance establish a debt management office and introduce a more formal borrowing strategy.
    - Strengthen the Bank of Ghana’s capital by replacing government receivables with treasury bills and longer-term government securities: Done, except for shares in Ghana International Bank (London).
    - Liquidate its ownership in banks: No change.

*Source: Ghana Financial System Stability Assessment (2001); IMF and World Bank update mission findings (July 2003, May 2003).*

### II. FINANCIAL SECTOR STABILITY ISSUES
#### A. Macroeconomic Environment
- Context at time of FSAP:
  - Domestic macroeconomic imbalances, especially fiscal, and severe terms of trade shocks led to sharp exchange rate depreciation and high inflation.
- Progress following PRGF program introduction in 2001:
  - Tighter control over government expenditures and high real interest rates helped reduce inflation:
    - Inflation: 42 percent in March 2001 → 21 percent by end-2001 → 15 percent at end-2002.
  - Cedi depreciated by almost 15 percent against the U.S. dollar during 2002, broadly in line with inflation.
  - Gross international reserves recovered to nearly two months of imports despite shortfall in donor financing.
  - Real GDP growth in 2002: estimated 4.5 percent.
  - Real growth in credit to the private sector: 12 percent in 2001 → 18 percent in 2002.
- Slippages late-2002 / early-2003:
  - Causes: weaknesses in public expenditure control; failure to implement key revenue measure; delays in divestiture plan; failure to adjust petroleum prices.
  - Consequences: large government expenditures, larger-than-expected foreign exchange inflows from cocoa prefinancing, large increase in petroleum prices early-2003 → inflation pressures.
  - Inflation: 30 percent in April 2003 → prompted central bank to raise prime interest rate twice by a total of 3 percentage points (to 27.5 percent) and step up open market operations.
  - Inflation subsequently declined to 28 percent in August 2003, and interest rates have followed.
- Effects on financial sector development:
  - High uncertainty from history of expansionary fiscal policy and high inflation discourages medium- to long-term commitments.
  - Markets for medium- to long-term debt and equity capital and related institutions are highly underdeveloped.
  - Government difficulty finding investors for treasury bills with maturities in excess of 91 days.
  - Commercial and rural banks’ credit-risk management eroded due to attraction of low-risk high-yielding short-term assets such as treasury bills, often offering high real returns.
  - Banks reluctant to invest in resources/infrastructure to lend to SMEs and maintain up-to-date risk-management practices.
- Potential turning point if reform program succeeds:
  - If government eliminates net domestic borrowing requirements in the year and brings inflation to single digits by early-2004, vulnerabilities remain due to narrow economic base and contingent liabilities from weak SSNIT.
  - Positive fiscal developments in 2003 led to decline in government borrowing requirements, oversubscriptions of auctions, and a sharp fall in nominal interest rates.
  - Further declines in interest rates, if confidence takes hold, could stimulate private-sector credit demand and require banks and supervisors to manage rising credit risks.

Key selected economic and financial indicators (1997–2002, end-of-period unless otherwise specified) — selected items preserved exactly:
- Real GDP growth: 4.2 (1997), 4.7 (1998), 4.4 (1999), 3.7 (2000), 4.2 (2001), 4.5 (2002)
- GDP (in billions of cedis): 14,113 (1997), 17,296 (1998), 20,580 (1999), 27,153 (2000), 38,071 (2001), 48,862 (2002)
- Inflation rate: 27.9 (1997), 14.6 (1998), 12.4 (1999), 25.2 (2000), 32.9 (2001), 14.8 (2002)
- Broad money (M3) (excluding foreign currency deposits) growth: 44.3 (1997), 20.2 (1998), 19.8 (1999), 33.4 (2000), 48.4 (2001), 50.0 (2002)
- Reserve money (excluding foreign currency deposits): ... (1997), ... (1998), 35.8 (1999), 52.6 (2000), 31.3 (2001), 42.6 (2002)
- Net domestic assets (in percent of broad money at the beginning of the period): 33.2 (1997), 15.9 (1998), 46.0 (1999), 49.1 (2000), 13.5 (2001), 13.7 (2002)
- Credit to government (in percent of broad money at the beginning of the period): 23.2 (1997), 49.9 (1998), 38.2 (1999), 57.7 (2000), 0.0 (2001), 30.0 (2002)
- Credit to public enterprises (deposit money banks to public enterprises): ... (1997), ... (1998), 9.0 (1999), 19.2 (2000), 9.7 (2001), -9.0 (2002)
- Credit to the private sector (deposit money banks to private sector): ... (1997), ... (1998), 24.9 (1999), 34.4 (2000), 12.0 (2001), 17.7 (2002)
- Yield on government bills (in percent): 45.7 (1997), 28.7 (1998), 34.2 (1999), 42.0 (2000), 28.9 (2001), 28.1 (2002)
- Central government financial balance (in percent of GDP): -10.3 (1997), -8.1 (1998), -8.2 (1999), -7.9 (2000), -7.7 (2001), -5.0 (2002)
- Total outstanding public debt (in percent of GDP): 76.3 (1997), 74.6 (1998), 73.7 (1999), 116.7 (2000), 116.1 (2001), 95.6 (2002)
- Domestic revenue (excluding grants) (in percent of GDP): 22.5 (1997), 29.8 (1998), 6.0 (1999), 42.9 (2000), 43.5 (2001), 27.5 (2002)
- Total expenditure (in percent of GDP): 29.0 (1997), 28.6 (1998), 26.2 (1999), 27.7 (2000), 32.7 (2001), 26.1 (2002)
- Current expenditure (in percent of GDP): 25.3 (1997), 28.2 (1998), 13.1 (1999), 48.9 (2000), 50.5 (2001), 28.8 (2002)
- Capital expenditure and net lending (in percent of GDP): 8.8 (1997), 9.5 (1998), ... (1999), 24.1 (2000), 95.7 (2001), -38.7 (2002)
- Cedi per U.S. dollar (period average): 2,050 (1997), 2,314 (1998), 2,669 (1999), 5,431 (2000), 7,179 (2001), 7,944 (2002)
- Real effective exchange rate (period average): 6.0 (1997), 8.2 (1998), 0.5 (1999), -35.5 (2000), 0.7 (2001), -0.6 (2002)
- Nominal effective exchange rate (period average): -15.0 (1997), -7.8 (1998), -9.3 (1999), -46.3 (2000), -24.0 (2001), -11.7 (2002)
- Current account (in percent of GDP): -7.0 (1997), -2.1 (1998), -4.4 (1999), -1.5 (2000), -0.7 (2001), 0.1 (2002)
- Direct investment, net (in percent of GDP): 0.52 (1997), 0.60 (1998), 0.59 (1999), 1.19 (2000), 1.06 (2001), 0.81 (2002)
- Portfolio investment, net (in percent of GDP): 0.3 (1997), -0.7 (1998), -0.4 (1999), 0.1 (2000), 0.6 (2001), 0.0 (2002)
- Overall balance of payments (in percent of GDP): 0.4 (1997), 1.4 (1998), -1.0 (1999), -0.5 (2000), 0.1 (2001), 0.1 (2002)
- Change in external arrears: 0 (1997), 0 (1998), 0 (1999), 27 (2000), 34 (2001), -61 (2002)
- Gross international reserves (in millions of U.S. dollars): 480 (1997), 550 (1998), 317 (1999), 264 (2000), 344 (2001), 635 (2002)
- Reserves in months of imports of goods and services: 1.6 (1997), 1.9 (1998), 1.0 (1999), 0.9 (2000), 1.2 (2001), 2.0 (2002)

Sources: Ghanaian authorities; and staff estimates and projections.

#### B. Banking System Vulnerabilities
- Exposure to Tema Oil Refinery (TOR):
  - One large systemically important bank retains significant exposures to TOR. Most TOR exposures were converted into government securities in 2001 and 2002, but on-balance sheet exposures for one large bank tripled in the first eight months of 2003 and are now well in excess of that bank’s capital. That bank also has large and growing off-balance sheet exposures to TOR.
- High level of past-due loans across the banking system.
- If interest rates decline and bank margins compress, banks may find it more difficult to carry large stocks of past-due loans.
- Expansion of private-sector lending, if realized, implies need for banks and supervisors to ensure prudent credit-risk management.

*This overlay summarizes findings drawn from the IMF/World Bank FSAP update mission and related material contained in the source chapter.*

### 10.      One large systemically important bank is vulnerable due to its large exposure to

### _cr03396 - 10.      One large systemically important bank is vulnerable due to its large exposure to

### Vulnerability from TOR exposure
- A large portion of TOR’s short-term debt was restructured into medium-term government bonds in 2001 and 2002.
- TOR has begun borrowing again from one large bank due to government delays in implementing petroleum price increases.
- That bank’s on-balance sheet exposure to TOR exceeded 150 percent of its capital in August 2003.
- The bank also has large off-balance sheet exposures to TOR in the form of letters-of-credit.
- If the government implements reforms to domestic pricing regimes intended to ensure full cost recovery in the energy, electricity, and water sectors, TOR should be in a better position to service its debts in the future.

### High level of past-due loans
- Past-due loans (consisting of “other loans especially mentioned” (OLEMs) and NPLs) climbed from 16 percent of total loans at the time of the FSAP to an eight-year high of 28 percent in 2001 and 2002.
- Past-due loans began to decline in the first half of 2003 and were less than 26 percent in June 2003.
- The sharp increase in inflation, rapid cedi depreciation, and subsequent interest rate hikes in early-2001 adversely affected small and medium-sized borrowers.
- The overall impact of higher OLEMs and NPLs was softened by most banks’ high profits, owing to very wide interest spreads; however, margins have been narrowing since the FSAP as interest rates trend down in real terms, which could make it more difficult for banks to carry large OLEM and NPL positions.

### Financial soundness indicators (selected points from Table 3, 1997–2002)
- Regulatory capital to risk-weighted assets: 15.2 (1997); 11.1 (1998); 11.5 (1999); 11.6 (2000); 14.7 (2001); 13.4 (2002).
- Percentage of banks greater or equal to 10 percent: 87.5 (1997); 75.0 (1998); 60.0 (1999); 62.5 (2000); 64.7 (2001); 52.9 (2002).
- Capital (net worth) to assets: 12.9 (1997); 12.8 (1998); 11.6 (1999); 10.7 (2000); 11.9 (2001); 11.4 (2002).
- Exposure to the public sector / Total loans and securities: 52.6 (1997); 51.5 (1998); 48.0 (1999); 50.4 (2000); 54.9 (2001); 52.0 (2002).
- FX loans to total loans: 25.6 (1997); 28.5 (1998); 33.4 (1999); 35.3 (2000); 34.1 (2001); 33.8 (2002).
- Past-due loans to gross loans: 24.6 (1997); 18.9 (1998); 20.1 (1999); 16.2 (2000); 28.0 (2001); 28.6 (2002).
- Non-performing loans: 21.6 (1997); 17.2 (1998); 12.8 (1999); 11.9 (2000); 19.6 (2001); 22.7 (2002).
- OLEMs: 3.0 (1997); 1.7 (1998); 7.3 (1999); 4.3 (2000); 8.4 (2001); 5.9 (2002).
- Provisions as percent of past-due loans: 78.0 (1997); 89.4 (1998); 67.2 (1999); 58.6 (2000); 46.4 (2001); 63.6 (2002).
- Return on assets (before-tax net income to average assets): n.a. (1997); 8.8 (1998); 8.5 (1999); 9.8 (2000); 8.7 (2001); 6.7 (2002).
- Return on equity (before-tax net income to average shareholder funds): n.a. (1997); 71.7 (1998); 70.1 (1999); 88.5 (2000); 76.9 (2001); 58.4 (2002).
- Net interest income/average assets: n.a. (1997); 11.8 (1998); 10.2 (1999); 11.4 (2000); 13.4 (2001); 10.0 (2002).
- Liquid assets/total assets: 57.8 (1997); 57.8 (1998); 53.4 (1999); 48.4 (2000); 42.7 (2001); 50.8 (2002).
- Loan/deposit: 42.2 (1997); 48.7 (1998); 59.0 (1999); 64.0 (2000); 63.9 (2001); 50.1 (2002).
- Net FX assets (liabilities) to shareholders' funds: 62.9 (1997); 48.1 (1998); (7.6) (1999); (9.4) (2000); 22.9 (2001); 24.3 (2002).

### Bank supervision and smaller banks
- Two small domestic commercial banks failed to meet the minimum capital adequacy requirement in 2002; supervisors restricted their lending activities and requested new capital injections.
- Their market shares and borrowings from other banks are small and unlikely to pose systemic risk.

### Stress test results and methodology
- Credit risk continues to be the main source of vulnerability for the banks.
- The stress tests were updated using the same scenarios as the FSAP; three scenarios were considered:
  - Scenario 1: recession-induced migration of current loans to past due (assumes 20 percent of current loans migrate to past due in 90 days; once past due, loans remain nonperforming; migration schedule to sub-standard, doubtful, loss over 360 days).
  - Scenario 2: redress under-provisioning with provisioning rates of 50 percent against OLEMs and 100 percent against all NPLs.
  - Scenario 3: redeploying 50 percent of each bank’s securities portfolio into loans of the same quality and provisioning requirements as the existing loan portfolio (excluding government bonds issued in exchange for TOR loans, since these bonds are not tradable).
- Scenario 1 implied total OLEMs and NPLs would increase by 15 percentage points to 43 percent of total loans 180 days after the initial shock.
- Scenario 3 would reduce the banking system’s capital adequacy ratio to 11 percent, with larger impacts on smaller banks with low capital positions.
- Results (FSAP Update, December 2002):
  - Banking system capital adequacy: initial position 13.4; After 90 days (Scenario 1) 10.9; After 180 days (Scenario 1) 7.2; Scenario 2 result 9.0; Scenario 3 result 10.8.
  - Number of banks below 6 percent (share of total banking system capital in parentheses): initial 2 (5.6); After 90 days (Scenario 1) 6 (29.0); After 180 days (Scenario 1) 12 (63.8); Scenario 2: 7 (31.4); Scenario 3: 5 (28.0).
  - Number of banks below zero (share of total banking system capital in parentheses): initial 1 (5.6); After 90 days (Scenario 1) 4 (7.1); After 180 days (Scenario 1) 6 (10.4); Scenario 2: 5 (8.1); Scenario 3: 2 (5.8).
- Caution in interpreting results: initial levels of OLEMs and NPLs used in March 2000 stress tests were 16 percent versus 28 percent in December 2002; banks remain convalescing from prior shocks, so vulnerability to new shocks is higher now.

### Sensitivity to interest rate and exchange rate risk
- Moderate interest rate changes have limited impact on bank profits due to modest maturity gaps and scope to adjust liability rates; however, as interest rates decline and deposit rates fall towards zero, protecting wide spreads will become more difficult.
- Exchange rate risk:
  - Bank of Ghana regulation limits a bank’s aggregate foreign currency open positions to 30 percent of its net own funds; this implies a maximum loss (gain) of 3 percent of a bank’s primary capital for every 10 percent of depreciation in cedis, depending on net positions.
  - At end-December 2002, five banks exceeded the limit by 1.3–18.7 percentage points.
  - All banks, except two small banks, showed net long positions on foreign currencies and would be positioned to profit directly from further cedi depreciation; indirect adverse effects could arise if depreciation undermined borrowers’ financial condition.

### Challenges posed by improving fiscal situation and implications for credit
- Exposures to the public sector continue to represent more than half of banks’ loan and securities portfolios.
- High secondary reserve requirements: banks must hold at least 35 percent of deposit liabilities in government securities (9 percent primary reserve; at least 20 percent in treasury bills and 15 percent in inflation-indexed government bonds).
- Continued fiscal consolidation and reduced government borrowing could:
  - Encourage banks to expand lending to the private sector.
  - Cause interest margins to shrink significantly and returns on assets to decline as treasury bill supply falls and deposit rates approach zero.
  - Prompt banks, especially rural banks with large treasury bill holdings, to boost non-interest revenues, curb operating expenses, and redeploy assets from government securities to loans.
- Policy suggestion: authorities were encouraged to consider replacing secondary reserve requirements with a more sophisticated framework for supervising bank liquidity management as fiscal consolidation takes hold; special concern over the inflation-indexed bond requirement because of maturity mismatches with deposit liabilities.

### Pension system (SSNIT)
- SSNIT assets: GC 3.9 trillion, or 8 percent of total financial sector assets.
- Improvements: appointment of a new Board of directors and a new director general in 2001 bolstered SSNIT’s independence.
- Ongoing threats: financial viability threatened by government interference in funding arrangements and investment decisions (example: government proposal to redirect a portion of SSNIT contributions to a new health insurance program).
- Medium-term consideration: authorities could consider allowing contributors to divert a portion of SSNIT contributions to private pension fund managers and instituting a pension fund regulatory body, provided private pension schemes and managers are well-regulated.

*Source: IMF staff report content (excerpt).*

### 24.      The banking system is dominated by the state-owned GCB and three

### _cr03396 - 24.      The banking system is dominated by the state-owned GCB and three

### Banking system structure and market shares
- The banking system is dominated by the state-owned GCB and three foreign-owned commercial banks.
- These banks account for about two-thirds of the system’s assets and deposits.
- The importance of foreign-owned banks in the system has increased since the FSAP—to about 55 percent of system assets—due in large part to the migration of a domestic commercial bank to this category following its purchase by a French banking group.
- Footnote: Foreign-owned commercial banks account for about 40 percent of banking system assets, while foreign-owned development and merchant banks account for an additional 15 percent.
- Banks only reach about 5 percent of all households.

### Competition, profitability, and cost structure
- Competition appears weak.
- Ghanaian banks have high overhead costs.
- Pre-tax returns on assets and equity are among the highest in sub-Saharan Africa due to very wide interest margins.
- Interest margins have narrowed since the FSAP as interest rates trended down in real terms.

### GCB divestiture, public concerns, and interim measures
- The government’s planned divestiture of GCB has been suspended amid public concern about potential foreign domination of Ghana’s banking sector.
- The suspension is viewed as a lost opportunity to stimulate competition and foster a more efficient banking system.
- Authorities consider that strategic involvement of an international bank, potentially with majority shareholding, may be needed to make GCB competitive; they have not ruled out reopening divestiture after the 2004 elections.
- Authorities were advised to present clearer safeguards in any divestiture plan (e.g., maintenance of the branch network) to address political concerns.
- Interim authority proposals:
  - Raise new share capital for GCB.
  - Develop and competitively tender a management contract for the bank.
  - These proposals were intended to be developed in more detail by the end of this year and aimed to be announced in the 2004 budget statement.

### Small- and Medium-Sized Enterprises (SME) access to financing
- Structural weaknesses hamper SME access to financing, including an unconducive macroeconomic environment.
- Additional obstacles: lack of adequate collateral and insufficient credit track records.
- Urgent policy actions recommended:
  - Ensure timely payment of the government’s obligations, in particular to SMEs, to avoid overburdening them with government arrears.
  - Improve corporate governance and financial reporting for Ghanaian firms; introduce a suitable legal framework to facilitate credit reference bureaus.
  - Address policy, legal, regulatory, and institutional bottlenecks for SMEs, such as inadequate property titles and weak judicial enforcement of foreclosure processes.
- Longer-term measures recommended:
  - Introduce more efficient payment instruments (common technological platforms for cash machines and point-of-sale facilities, and credit/debt cards) to facilitate e-commerce.
  - Develop more effective ways to attract and facilitate investment from internationally-connected Ghanaians and other high-growth entrepreneurs.

### Housing finance
- Most lenders avoid housing finance; Home Finance Company (HFC) is practically the only mortgage supplier.
- Reasons for lender reluctance:
  - Poor macroeconomic policy environment leading lenders into high-yielding treasury bills.
  - Weak property title system and inefficient foreclosure processes.
  - Weak institutional arrangements with six ill-coordinated, interdependent agencies and absence of dispute resolution bodies provided by law.
  - Poor government management of land held as fiduciary agent of customary owners.
- Recommendations:
  - Extend the favorable legal framework that governs HFC’s lending to other potential mortgage lenders (e.g., banks).
  - Reduce import duties on construction goods to lower housing construction costs.

### Insurance industry structure and weaknesses
- Industry composition: mainly short-term property and casualty business.
- Insurance metrics:
  - Insurance premiums as a percent of GDP were less than one percent in 2001.
  - Insurance company assets represent about 1½ percent of the total for the financial sector.
  - Less than 10 percent of insurance premiums are for life insurance policies.
- Contributing factors to low insurance penetration: high inflation; low per capita income; lack of understanding of insurance among the population; weaknesses in the supervisory policy framework.
- Recommendations:
  - Proceed with introduction of the planned insurance industry training center to improve business skills and public awareness.

### Insurance market structure and firm viability
- Of the 18 companies operating in Ghana:
  - 8 are insolvent.
  - 5 others are sufficiently weak that the National Insurance Commission (NIC) has asked them to prepare action plans.
- Market dominated by State Insurance Company (SIC), though SIC has ceded significant market share recently.
- Two private companies have increased market share; market would benefit from allowing such firms more room to expand (for example, by removing SIC’s monopoly on public sector insurance).
- The state-owned reinsurer (Ghana-Re) still enjoys a protected market.
- SIC and Ghana-Re have reduced staff over the last three years to cut costs and rebuild profits.

### Financial markets: equity, government securities, and foreign exchange
- Financial markets remain at an early stage of development; trading activity is limited on the Ghana Stock Exchange (GSE) and in government securities markets.
- Little interest from companies to list on the exchange aside from privatizations.
- Foreign exchange market functioning better; queues for foreign exchange have fallen sharply since 2000.
- An interbank foreign exchange market had yet to develop (expected introduction referenced in later section).

### Measures to deepen markets and improve infrastructure
- Suggested measures to increase market activity and liquidity:
  - Improve local companies’ financial reporting and governance to foster an investment culture.
  - Rationalize tax treatment of investment income across capital market instruments and investment vehicles.
  - Increase divestitures of state-owned enterprises through the GSE where appropriate.
  - Pursue closer cooperation between the GSE, the Nigerian Stock Exchange, and the eight-member Bourse régionale de valeurs mobilières to mitigate small-illiquid exchange constraints.
  - Further liberalize ceilings on foreign portfolio investment (residents of ECOWAS countries in short term; all foreign investors in medium term) conditional on improvements in macroeconomic fundamentals and financial sector supervision.
- Market infrastructure recommendations:
  - Support GSE demutualization to raise capital for investment in efficient trading systems.
  - Thoroughly assess cost-benefit of a proposed central depository with dematerialized securities before implementation.

### Legal and regulatory framework: draft laws and legislative progress
- New laws introduced since the FSAP include the new Bank of Ghana Act and the new Securities Industry Amendment Act.
- Draft laws intended to improve legal foundations for financial intermediation include:
  - (i) the Banking Bill; (ii) the Payments Systems Bill; (iii) the Bills and Checks Bill; (iv) the Money Laundering Bill; (v) the Offshore Banking Bill; (vi) the Foreign Exchange Bill; (vii) the Credit Union Bill; and (viii) the Insurance Bill.
- Legislative status:
  - The Banking and the Payments Systems Bills are before parliament.
  - The Bills and Checks Bill is with the Justice Department and will be sent to parliament.
  - The Bank of Ghana has completed the Money Laundering Bill, which will be sent to the attorney general and subsequently to parliament.
  - Authorities believe these four bills can be enacted this year.
  - The other four bills were being completed and expected to be introduced in parliament in 2004.

### Supervision of banks and non-bank financial institutions
- Bank of Ghana modernization achievements over past three years:
  - Launched capacity building program, resulting in use of computer audit procedures for bank examinations.
  - Introduced a more streamlined Report of Examination for onsite inspections.
  - Implemented stricter licensing procedures for new entrants.
- Enforcement concerns:
  - Three chronically weak banks closed since the FSAP, but enforcement remains weak.
  - Example: a small commercial bank operated with negative capital for more than two years (lending activities frozen); required capital not injected despite Memoranda of Understanding in 2002 and 2003.
  - Many rural banks, finance companies, and savings and loan associations operate with capital consistently below required minimums.
- Banking Bill implications:
  - Enacting the Banking Bill would enable Bank of Ghana to define new capital adequacy requirements, issue new loan classification and provisioning requirements aligned with international practices, and supervise banking groups on a consolidated basis.
  - Once law is enacted, Bank of Ghana should issue guidelines for consolidated supervision and establish cooperation and information sharing with other supervisors (e.g., NIC) and home country supervisors for foreign-owned banks.

### Market risk supervision and preparedness
- Need to increase Bank of Ghana’s capacity to supervise bank exposure to market risks, particularly in light of the expected introduction of an interbank foreign exchange market in 2004.
- Review of the Examination Manual found limited guidance on basic examination procedures in:
  - Foreign exchange area.
  - Back-office trading operations.
  - Securities investments.

### Insurance supervision developments
- NIC actions despite out-of-date insurance legislation:
  - Closed five insolvent companies using liberal interpretation of existing powers.
  - Supervision relies heavily on offsite analysis from annual returns, which are generally delayed.
  - No regular onsite inspections historically, though a taskforce was established in mid-2003 to conduct regular inspections, backed by quarterly prudential reporting.
  - NIC is establishing a program to monitor reinsurance companies.

### Securities regulation improvements and remaining gaps
- Improvements:
  - Capital requirements for securities dealers improved.
  - Dealers required to submit cash flow statements to SEC monthly (balance sheet and income statements quarterly).
  - SEC introduced regulations for collective investment schemes and took responsibility from the GSE for reviewing information memoranda for securities offerings.
- Remaining issues and recommendations:
  - Dealer capital requirements still fall short of best practice.
  - Authorities urged to reconsider allowing dealers to accept deposits.
  - Increase penalties for securities regulation violations (some currently equivalent to only US$120 per day).
  - Consider extending the SEC’s mandate to include the government securities market due to dealer activity and reported inappropriate trading behavior.

### Public debt management
- Government previously had limited control over debt structure due to large domestic borrowing requirements, causing undersubscription problems and acceptance of almost all auction bids.
- Investors preferred 91-day treasury bills, exposing government to interest rate and rollover risk.
- Continued adherence to fiscal program targets expected to alleviate these problems and allow lengthening of debt maturity.
- Very recent decline in borrowing requirements led to oversubscription of recent auctions.
- Sovereign rating:
  - In August 2003, Ghana received a B+ (stable) credit rating from Standard & Poor’s.
  - This rating could boost investor awareness and help differentiate Ghana in the region, and may spur improvements in corporate governance and disclosure standards.

### Anti-Money Laundering / Combating the Financing of Terrorism (AML/CFT)
- Lack of AML/CFT legislation risks undermining Ghana’s ability to address domestic financial system abuse and risks its international reputation.
- The FSAP update did not include an AML/CFT assessment.
- IMF and World Bank stand ready to provide technical assistance on request.
- Ghana, as a member of the recently established FATF-style regional body for West Africa, is preparing for an AML/CFT assessment using the methodology endorsed by the FATF and the IMF’s Executive Board in 2002.

*Source: _cr03396 - 24.      The banking system is dominated by the state-owned GCB and three (IMF PDF content).*

### 47.      There have been several important reforms to the monetary policy framework.

### _cr03396 - 47.      There have been several important reforms to the monetary policy framework.

### Monetary policy framework reforms
- In January 2002, a new Central Bank Law came into effect.
  - Establishes and guarantees the independence of the Bank of Ghana.
  - Confirms the pursuit of price stability as its primary objective.
  - Includes provisions aimed at enhancing operational efficiency and strengthening supervisory role.
  - Paved the way for creation of a Monetary Policy Committee, which now meets every second month to set the stance for monetary policy.
- Bank accounting and auditing practices have been significantly improved.
  - The July 2003 IMF Safeguards Assessment noted that further steps should be taken to address remaining weaknesses in its financial controls.
- The Bank of Ghana continues to hold shares in a commercial bank—Ghana International Bank (London).
  - Divesting these shares would help to bolster the independence of the central bank.

### Effectiveness of monetary policy instruments
- In March 2002, the bank established a “prime” central bank interest rate.
  - Serves as the rate charged to commercial banks for borrowing from the central bank on an overnight basis under the repo facility.
  - Borrowings under this facility are collateralized by treasury bills.
- In late-2002, the reverse repo facility was restructured:
  - It is now a 7- or 14-day facility with rates set at the bank’s prime rate less 1 percent.
- These steps should provide greater scope for interest rates beyond the very short term to be determined by market forces.

### Recapitalization of the Bank of Ghana
- No progress has been made in recapitalizing the Bank of Ghana.
- FSAP recommendations:
  - Recapitalize the bank to bolster operational independence by replacing large holdings of non-marketable claims on the government with negotiable securities that pay market rates of interest.
  - Consistent with the new Bank of Ghana Act, issue new shares to increase the bank’s capital from GC 100 billion to GC 500 billion.
- Reasons for inaction:
  - Government preoccupied with restructuring of TOR’s obligations to the banking system and preferred to avoid another major recapitalization effort.
- Emerging concern:
  - Need for recapitalization likely to become more acute as the bank is absorbing the debt service cost for securities issued for liquidity management purposes.

### Technical assistance support
- IMF and World Bank support to implement FSAP recommendations:
  - IMF: technical assistance on foreign exchange and domestic debt market and central bank accounting issues.
  - World Bank: support in banking and NBFI regulation and supervision, insurance regulation and supervision, capital markets regulation and supervision, and to a lesser extent, social security reform.
- Going forward:
  - FIRST Initiative agreed to provide technical assistance to support authorities’ efforts to launch the interbank foreign exchange market in 2004.
  - World Bank will provide ongoing technical support on government policy towards GCB (in conjunction with FIRST), and will strengthen support of social security reform.
  - IMF and World Bank stand ready to offer technical assistance to strengthen the country’s AML/CFT regime.

### Financial sector overview — key statistics (December 2002)
- Bank assets-to-GDP ratio: 39 percent at end-2002.
- Rural banks and other nonbank financial institutions: 5 percent of GDP in 2002.
- M2 as a share of GDP: 19 percent in 2002.
- Currency in circulation: 8 percent of GDP.
- Table 1 aggregates (selected entries preserved exactly as in source):
  - Commercial banks (sub-total): Number of institutions 17; Branches 309; Assets (Billions of cedi) 18,668; (% of Sub-total) 100.0; (% of GDP) 39.1
    - Large commercial banks: 4; Branches 217; Assets (Billions of cedi) 12,058; (% of Sub-total) 64.6; (% of GDP) 25.2
      - Ghana Commercial Banks (GCB): 1; Branches 134; Assets (Billions of cedi) 4,624; (% of Sub-total) 24.8; (% of GDP) 9.7
      - Foreign-owned banks: 3; Branches 83; Assets (Billions of cedi) 7,434; (% of Sub-total) 39.8; (% of GDP) 15.6
    - Small commercial banks: 5; Branches 12; Assets (Billions of cedi) 997; (% of Sub-total) 5.3; (% of GDP) 2.1
  - Development banks: 3; Branches 62; Assets (Billions of cedi) 2,738; (% of Sub-total) 14.7; (% of GDP) 5.7
  - Merchant banks: 5; Branches 18; Assets (Billions of cedi) 2,875; (% of Sub-total) 15.4; (% of GDP) 6.0
  - Rural banks: Number of institutions 115; Branches 353; Assets (Billions of cedi) 864; (% of Sub-total) 100.0; (% of GDP) 1.8
  - Insurance companies (2001 data) — Sub-total: Number of institutions 21; Assets (Billions of cedi) 4,596; (% of Sub-total) 100.0; (% of GDP) 9.6
    - Social Security and National Insurance Trust: 1; Branches 45; Assets (Billions of cedi) 3,873; (% of Sub-total) 84.3; (% of GDP) 8.1
  - Other nonbank financial institutions — Sub-total: Number of institutions 286; Assets (Billions of cedi) 1,531; (% of Sub-total) 100.0; (% of GDP) 3.2
  - Total financial sector: 439 institutions; Assets (Billions of cedi) 25,659; (% of GDP) 53.7
- Sources: Bank of Ghana, and IMF staff calculations

### Updates on observance of international standards and supervisory frameworks
- A. Basel Core Principles for Effective Banking Supervision
  - FSAP (2000–01) found a high degree of compliance but noted shortcomings, particularly supervisors’ tendency to favor moral suasion rather than aggressive enforcement.
  - Specific shortcomings cited by FSAP:
    - Prior approval of the minister of finance required to issue banking licenses and amend bank minimum capital adequacy ratios; Bank of Ghana required to consult the minister when dealing with banks in distress.
    - Insufficient information sharing requirements; no arrangements between domestic agencies responsible for financial system soundness; weak supervision of foreign-owned entities due to absent memorandums of understanding with foreign supervisors.
    - Limits on foreign exchange exposures were not enforced.
    - No anti-money laundering legislation in place.
    - Banking supervision conducted on a solo basis; no regulations for consolidation.
  - Factual update:
    - Bank of Ghana is still awaiting passage of the new Banking Bill, which will strengthen the legal framework for supervision, licensing, and introduce consolidated supervision and information-sharing.
    - Passage of the pending Money Laundering Bill will help improvements in AML/CFT.
    - Authorities have yet to conclude memorandums of understanding for sharing information with supervisors of other financial sectors in Ghana or with foreign banking supervisors.

- B. IAIS Core Principles of Insurance Supervision
  - FSAP (2000–01) found only a weak degree of observance but noted effective supervision by NIC due to quality and energy of staff.
  - Shortcomings identified:
    - Lack of regular on-site inspections.
    - NIC’s lack of formal authority to intervene when transfer of control is contemplated.
    - Lack of rules on corporate governance; matching of assets and liabilities; related party investments.
    - Absence of tests for adequacy of reserve for unexpired risks and formal process for assessing collectability of reinsurance recoveries.
    - Absence of program to monitor reinsurance arrangements.
    - Lax reporting requirements.
    - No specific legal provision for confidentiality, though maintained in practice.
  - Factual update:
    - Situation largely unchanged due to staff and financial constraints and inadequate insurance legislation.
    - New draft legislation contains provisions addressing corporate governance, internal controls, sanctions, confidentiality, regular reporting, and regular onsite inspections.
    - In mid-2003, NIC established a taskforce to conduct regular inspections, backed by quarterly reporting by insurance companies, and is establishing a program to monitor reinsurance companies.

- C. IOSCO Objectives and Principles of Securities Regulation
  - FSAP (2000–01, based on September 1998 IOSCO) found a high degree of observance but identified shortfalls:
    - Insufficient independence and internal controls for the regulator.
    - Inability to cooperate and share information with foreign counterparts.
    - Lack of risk-weighted capital requirements for licensees and internal standards for intermediaries.
    - Gaps in issuance of securities and regulation of collective investment schemes.
  - Factual update:
    - SEC 2003 Regulations are now in place.
    - Securities Industry Amendment Act (SIAA) passed end of 2000; Unit Trusts and Mutual Funds Regulations introduced in 2001.
    - Oversight of SEC by the minister of finance substantially reduced under the new SIAA, but SEC’s independence undermined by financial dependence on the ministry; revenues from new SEC levy on securities transactions likely to fall well short of meeting financial requirements.
    - SEC has an operations manual to govern staff private investment activity; lacks a written contingency plan to cope with market disruptions.
    - SEC has limited bilateral arrangements for cooperation with foreign regulators; intends to apply for participation in multilateral Memorandum of Understanding by IOSCO.
    - SEC may share certain information only in the context of a criminal investigation under Ghanaian laws.
    - SEC’s purview excludes Government of Ghana Treasury bills and bonds; entities regulated by SEC are active in the market for treasury bills and anecdotal evidence of front-running and inappropriate trading behavior persists outside SEC regulation.
    - Recommendation: Extend SEC authority to all activities of its licensees.
    - 2003 SEC regulations amended capital requirement to be a percentage of aggregate indebtedness (as determined by circular by the SEC); liquid funds requirement linked to securities positions.
    - SEC can require a broker to inject additional funds to enhance liquidity; fines for not meeting capital requirements remain token and suspension of activities comes only after 30 days.
    - Reporting frequency improved from quarterly to monthly.
    - No amendment to provision permitting securities dealers to accept client deposits (contradiction with regulations requiring deposit takers to be licensed by the Bank of Ghana); 2003 SEC Regulations explicitly determine disclosure conditions for this practice.
    - No improvement in regulations to prevent use of broker-dealer accounts for money laundering: no restrictions on transactions in cash, and no requirements to report suspicious activity.
    - Marked improvements in regulation of collective investment schemes under 2001 Unit Trusts and Mutual Funds Regulations: closed-end investment vehicles possible; comprehensive regulations establishing separation of functions between investment managers, custodians and trustees.
    - SEC has established review and approval powers for all public offerings through the SIAA.

*Source: IMF staff report text (extracts from _cr03396).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03396.pdf_