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AfricaMay 7 2020

Ghana banks prepare for coronavirus clean-up

Following several years of consolidation and central bank measures to tackle bad loans and slack regulation, Ghana’s well-capitalised banking sector look suitably robust to help its clients through the coronavirus pandemic and after. Jason Mitchell reports.
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Bank of Ghana

Ghana’s banking sector has undergone a wholesale transformation since 2017. An economic downturn beginning in 2014, combined with weak regulatory oversight and poor lending practices, left the country’s banks in an extremely vulnerable position, with worrying levels of non-performing loans (NPLs) across the sector.

However, while asset quality remains a concern in 2020, the country’s surviving banks began the year in a far stronger position, with profitability and NPL ratios posting significant improvements in 2019. And while the full impact of the coronavirus pandemic on lenders is yet to play out, the central bank, Bank of Ghana, has been proactive in trying to protect the sector through easing regulatory requirements for the short term.

On the right track

Bank of Ghana began a comprehensive overhaul of the banking sector in August 2017, after studies in 2015 and 2016 revealed worrying levels of bad loans at some of the country’s biggest lenders, as well as low capitalisation and provisioning. The retail banks’ total stock of NPLs jumped to 8.58bn cedis ($1.47bn) at the end of 2017, from 6.14bn cedis at the end of 2016.

Of particular significance was the central bank’s decision to raise the minimum capital requirement for retail banks to 400m cedis by the end of 2018, from 120m cedis previously, which prompted a consolidation wave.

In August 2017, the Bank of Ghana gave partly state-owned bank, GCB Bank, the green light to acquire two local banks whose assets had been severely impaired, UT Bank and Capital Bank. The following year UniBank, one of the country’s top five lenders, was placed in administration, with its assets also transferred to GCB, alongside those of four other distressed lenders.

Unsurprisingly, the announcement of two further mergers – which saw FNB acquire GHL and Atlantic Bank agree to buy Energy Commercial Bank Ghana – came just ahead of the December 31 deadline for new capital requirements. In early January 2019, Bank of Ghana also approved the merger of OmniBank with Sahel Sahara Bank, which had been announced in mid-2018.

Room for consolidation

All in all, the clean-up led to the exit of nine banks and nearly 400 microfinance companies from the sector, together with several microcredit companies, savings and loan firms and others. Even in its leaner state, the Ghanaian banking sector remains ripe for further mergers, according to some analysts. 

“When compared with other bigger economies, such as Nigeria, which have fewer commercial banks, we can say there is room for further consolidation in Ghana,” says Nkechi Akunyili, managing partner at Access View Africa, a business and banking consulting firm based in Accra, and a former regional treasurer for west Africa at United Bank for Africa.

“I think about 10 solid banks would be sufficient. Despite the large number of banks in the country, we do not really see enough competition between them and the product offering of the banks is pretty homogenous,” she adds.

Money-laundering scandals

While Bank of Ghana continues its work to strengthen the financial sector, Ghana’s prosecutors are pursuing former senior bankers through the courts.

Former Beige Bank CEO Michael Nyinaku appeared in court in January 2020 accused of money laundering and stealing 341m cedis, according to Bloomberg. The founder of UT Bank, Prince Kofi Amoabeng, appeared in a separate hearing, accused of money laundering and theft of 51.3m cedis and $8.6m. Both men have previously denied any wrongdoing.

The following month, the government announced it was filing charges against a former finance minister, a former deputy governor of the central bank and several other high-profile banking executives. The charges range from money laundering to defrauding depositors, according to Bloomberg.

While the clean-up has undoubtedly left the sector in a stronger place, the cost has been high. The authorities estimated the total fiscal cost of the clean-up was 17.7bn cedis, or 5% of gross domestic product, according to the World Bank. Ghanaian finance minister Ken Ofori-Atta says 787m cedis had been paid to 15,997 customers of collapsed microfinance firms as of March 2020.

Mr Ofori-Atta noted that plans to increase compensation for depositors with failed savings and loan companies, which had previously been capped at 20,000 cedis per customer, may raise the cost of the sectoral clean-up to 20bn cedis, as reported by Bloomberg. 

Governance improvements

Asset quality across Ghana's banking sector is in double digits but is gradually trending lower; the NPL ratio for the sector fell to 13.9% in December 2019 from 17.3% in October 2019, according to Bank of Ghana, coming down from more than 23% in early 2018. “Bank of Ghana has every reason to feel confident about gains and achievements made so far in the financial sector,” the central bank governor, Ernest Addison, said in January.

“The sector is healthier, is better able to withstand financial shocks, compared with what we inherited at the beginning of 2017. It is better capitalised, it is more liquid and profitable, it is more efficient and has adequate available assets. The banking sector’s performance has been encouraging and, as regulators, we will continue to hold banks accountable,” he added.

Besides recapitalisation and consolidation, Bank of Ghana has moved to improve governance standards, issuing a corporate governance directive (CGD) in December 2018, and a fit and proper persons directive in July 2019. “In particular, enforcement of the CGD has led to several board chairs and CEOs of banks ending their tenure, while board members who had served for prolonged periods have been replaced,” said Mr Addison in February.

“In addition, results of a recent survey indicate full compliance with requirements of the CGD on the size, structure, composition and qualification of bank boards; due diligence in the appointment of key management personnel; and separation of the positions of CEOs and board chairs.”

Profitability up

Bank of Ghana regulates a total of 23 universal banks (14 foreign owned and nine domestically controlled), serving a population of just over 30 million. Total assets amounted to 129bn cedis in December 2019, a 22.8% jump on the previous year, according to Bank of Ghana data.

The banks’ profitability has been rising dramatically. Total after-tax profit of all the banks stood at 3.3bn cedis in December 2019, a 38% rise on the year before, according to the central bank. Net interest income was up by 23.6% to 9.27bn cedis during 2019, compared with the marginal 1.5% growth recorded in 2018.

Bank of Ghana says the jump in net income in 2019 came on the back of significant rises in both net interest income and fee and commission income, which outstripped the growth in operating expenses. Net fees and commissions totalled 2.24bn cedis in 2019, representing a growth of 15.3% during the year compared with growth of 14.6% in 2018.

The sector’s return on equity increased to 19.9% at the end of December 2019 from 18.5% in December 2018, while return on assets went up to 4.1% in December 2019 from 3.3% a year earlier, according to Bank of Ghana. Ghanaian commercial banks had an average capital adequacy ratio of 17.5% in December 2019, well above the regulatory minimum of 13% under the new Basel II/III framework, according to the World Bank. Banks are liquid – the sector core liquid asset to short-term liabilities ratio reached 30.5% in December 2019.

“Bank of Ghana data suggests that the banking system is largely sound,” says Pierre Laporte, World Bank country director for Ghana. “The improved soundness of the banking sector is a result of the decisive resolution and clean-up measures taken by the central bank, with support from the Ministry of Finance.” 

In particular, these measures have supported the local loans market. “Before the financial sector clean-up took place, many Ghanaian banks did not have capacity due to single obligor limits and sometimes [did not even have] actual liquidity to make loans above 200m cedis,” says Ms Akunyili at Access View Africa. “With increased capital, three banks can now come together to syndicate loans of up to 600m cedis among themselves due to increased capacity and liquidity. That’s a big help to large Ghanaian companies that require credit.”

Covid-19 mitigation 

As the scale of the global coronavirus pandemic, and its impact on the world economy, became apparent in mid-March, Bank of Ghana was swift to introduce a range of measures to ease pressure on the local economy, while temporarily relaxing restrictions on lenders to free up capital.

The central bank announced on March 18 it was reducing the country’s base rate to 14.5% from 16%, and cutting the primary reserve requirement for banks to 8% from 10%. The move is likely to free up about 1.6bn cedis in capital, according to Moody’s.

Bank of Ghana has also slashed banks’ capital adequacy ratios to 11.5%, in a bid to protect banks – at least temporarily – from potentially higher credit losses arising from a deterioration in asset quality during the emergency. It has also reduced the requirement for banks and specialist deposit-taking institutions to provision for the ‘other loans especially mentioned’ category (loans that banks consider as having deviated from prudent lending practices) to 5% from 10%.

The central bank has also agreed with retail banks and mobile money operators ways to make it easier for customers to use digital forms of payments during the next three months. All mobile money users can now send up to 100 cedis free (excluding cash out). The daily transaction limit on a basic know your customer account was raised to 1000 cedis from 300 cedis.

“We expect Bank of Ghana’s recent measures to help mitigate the negative effects of the coronavirus on banks’ asset quality and liquidity,” says Christos Theofilou, a vice-president and banking analyst at Moody’s. “In addition, the measures will provide some relief to banks’ income statements by reducing certain provisioning requirements and improving usability of mobile and digital payments channels.

“The extent to which banks deploy funds will likely depend on whether the authorities also provide other incentives such as guarantees and supported lending schemes targeted on affected borrowers.”

On March 30, 2020, the government imposed a partial lockdown on the country’s two biggest cities, Accra and Kumasi, for an initial two weeks. The central bank told banks, savings companies, loans companies, finance houses, rural and community banks, microfinance institutions and foreign exchange bureaux to trigger their business continuity plans. It said a minimum number of staff should attend offices and branches to ensure they remained open to the general public and that ATMs, electronic channels and all payment platforms operated well.

Retail banks' measures

Ghana’s retail banks agreed, on April 6, to a 2% reduction on the interest charged on all existing local currency-denominated loans and on all new loans. “This rate cut shall cover not only the period of the pandemic but banks recognise that it will take businesses and individuals some time after the end of the pandemic to re-tool and re-stock to achieve the semblance of normalcy,” says Daniel Mensah, chief executive officer of the Ghana Association of Bankers, the banking industry’s main trade association.

“The rate cut will therefore cover the remaining tenor of the facility. We recognise with concern the challenges some of our clients have had to go through during the pendency of the pandemic; to mention a few, we note real challenges facing the airlines and general transportation businesses; hotels and other tourism-related businesses; importers/exporters; and our clients who are staff of these worst affected businesses,” adds Mr Mensah.

In early April, Absa Bank Ghana – which completed its rebranding from Barclays Bank Ghana in February 2020 – became one of the first banks in the country to offer clients a financial relief package. It included a six-month repayment moratorium to all personal and business customers hit by Covid-19.

“This pandemic is nothing we have seen before and is very alarming to say the least,” says Abena Osei-Poku, managing director of Absa Bank Ghana. “It is important for us to support our customers who keep us in business. We will keep monitoring the developments on Covid-19 and take the decisions that will be in the best interest of customers.

“Our primary focus is on serving our customers in a safe environment, while maintaining the health and well-being of our employees, their families and the general public. We have ensured that our customers will have access to secure and convenient services during this period through our digital channels, cash-accepting ATMs and our relationship managers.”

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Read more about:  Africa , Ghana