IMF Survey: Ghana's Reforms Transform Its Financial Sector

IMF News, May 22, 2008

Source details

Ghana's macroeconomic stabilization has enabled notable development of its financial sector, attributed to solid "buy-in" from key stakeholders—especially the private sector—and coordinated donor assistance.
Goal emphasized: financial stability through deeper markets and better resource allocation.
Source authors: Mahamadu Bawumia and Theresa Owusu-Danso (Bank of Ghana) and Arnold McIntyre (IMF African Department).
Publication date: May 22, 2008.

Financial-sector liberalization was well-sequenced, with enhanced competition (including from abroad) and gradual capital account liberalization.
The joint IMF-World Bank Financial Sector Assessment Program (FSAP) assessment in 2000 and its 2003 update identified a medium-term financial-sector strategy and guided reforms.
Key indicators of success:
- Growth rose to 6.3 percent in 2007 from 4.5 percent in 2002.
- The ratio of money (M2) to GDP doubled after 2004, reaching 43 percent of GDP by the end of 2007.
- Banks account for about 70 percent of the financial sector.
- Capital adequacy ratio reached 14.8 percent in 2007 from 9.5 percent in 2003.
- Share of nonperforming loans fell to 5.4 percent in 2007 from 14.7 percent in 2003.

Reforms guided by the government's Financial Sector Strategic Plan to deepen the financial sector, build capital markets, and increase outreach and access.
Coordinated donor assistance was vital for institutional development and training programs.
Reduced direct state involvement has increased financial sector dynamism; the government expected to complete selling its shares in private financial institutions by the end of 2008.
The state's role is shifting toward oversight to ensure the integrity of the financial system.
In pensions, facilitation of private schemes is seen as vital to building the domestic capital market.

The banking system dominates Ghana's financial system; total banking system assets to GDP were 72.4 percent in 2007.
Concentration: the three largest banks accounted for 41 percent of banking sector assets.
Financial soundness improvements:
- Emphasis on capital adequacy, bank risk management, and more on-site supervision.
- Despite rapid credit expansion, the banking system's resilience to shocks increased through stronger regulation, technological advances, and improved risk management.
- The central bank publishes a periodic financial stability report discussed by its monetary policy committee.

Partial capital account liberalization via the Foreign Exchange Act in 2006 opened up longer-term instruments to nonresident investors and accelerated bond market development.
Remaining challenges in capital markets:
- Secondary government bond market is illiquid because most non-central-bank-held bonds are bought by banks.
- Need to broaden the local private investor base beyond the Social Security and National Insurance Trust and the State Insurance Corporation.
- Ghana Stock Exchange (GSE) characteristics: small and illiquid, total value traded is less than 1 percent of GDP, and turnover is below 4 percent.
- Regulatory reform of the GSE completed; priorities include expanding the investor base through public education and fiscal incentives for mutual and private pension funds.

Priorities identified:
- Deepen secondary capital markets.
- Reform small and medium-sized enterprise finance, microfinance, and rural banking.
- Increase the private-sector role in the pension and insurance systems.
- Expand the equity market and ensure careful supervision of the evolving financial system.
- Address cost inefficiencies that keep interest rate spreads too high.
- Continuously adapt supervision to maintain stability amid rapid financial deepening and new financial instruments.
- Update the government's Financial Sector Strategic Plan to address these priorities.
Financial inclusion objective:
- Banking serves only about 10 percent of the bankable population.
- The central bank, with commercial banks, is spearheading a National Payments System to ensure delivery of financial services to all segments of the population, to be in place by June 2008.

Medium-term goal: firmer regulation of nonbank financial institutions.
The Bank of Ghana drafted a nonbank bill covering:
- Licensing, capital, liquidity, and other requirements.
- Ownership and corporate governance.
- Accounts and financial statements.
- Powers of supervision and control.
- Receivership and liquidation.
The nonbank bill is presented as a key element to bolster regulation and supervision for a dynamic financial sector.

IMF Survey: Ghana's Reforms Transform Its Financial Sector — Mahamadu Bawumia, Theresa Owusu-Danso, and Arnold McIntyre; May 22, 2008.