Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldAugust 1 2013

Ghanaian banks bet on the long term

Ghana’s banking industry is buoyant, benefiting handsomely from huge leaps in the country’s economic growth. But with fears the economy is overheating and competition for business fierce, what is the longer-term outlook for Ghana's banks?
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Ghanaian banks bet on the long term

Ghanaian newspapers are full of advertisements from banks trying to tempt people to deposit money. CAL Bank, a mid-sized lender, is offering anybody who deposits 300 cedis ($147) the chance to win flat-screen televisions, smartphones and microwave ovens. If they up their balance to 1500 cedis, they might even win a house. Plenty of other banks have similar campaigns under way, including Ghana Commercial Bank (GCB) and Barclays, the west African country’s second and third largest banks by assets, respectively. “Everyone is scrambling for deposits,” says Simon Dornoo, head of GCB.

The push to raise deposits demonstrates how determined Ghana’s banks are to maintain the pace of expansion they have experienced in recent years. For the past seven years, assets across the sector have risen at an average annual rate of 32%, according to investment bank Renaissance Capital. This has chiefly been possible because of banks’ ability to grow their deposit bases just as quickly.

Tempting opportunities

The buoyancy of its banking industry reflects that of Ghana’s economy. Real gross domestic product (GDP) rose 14% in 2011 and 8% in 2012. This year the figure is forecast to be between 6.5% and 8%. Banks have benefited handsomely. “There are some amazing opportunities,” says Mr Dornoo. “Economic growth is certainly translating into banking sector growth and profitability.”

 

Fierce competition among Ghana's banks prompts talk of consolidation

Competition in Ghana’s banking sector is fierce. There are 27 universal banks in the west African country, which is a lot for a $39bn economy with 25 million people. Nigeria, which has a population six times bigger and a gross domestic product about seven times greater, has just 23 commercial lenders.

Some bankers in Ghana say consolidation would be beneficial. They argue it would create lenders with bigger balance sheets and make it easier to fund large-scale infrastructure projects using local capital. It would also boost banks’ efficiency. “From a banker’s perspective, it would make sense to have some consolidation,” says Kevin Wingfield, head of personal and business banking at Stanbic Ghana. “Having fewer, but bigger, banks would allow them to create economies of scale.”

Yet few believe that a round of takeovers will take place any time soon. In 2011, Ecobank Ghana bought the Trust Bank to become the country’s biggest lender by assets. But since then there have been no more mergers between local banks. And the only proposed deal of note involving a foreign lender was the attempted acquisition of Merchant Bank, a mid-tier lender, by South Africa’s FirstRand, which fell through in July.

Most Ghanaian banks seem reluctant to carry out takeovers, instead preferring to grow organically. There are few obvious targets in the country. Many lenders are foreign-owned, with their parents perceived as unlikely to want to sell them. And the government has stakes in some of the others, which puts off would-be buyers. (FirstRand’s attempt to buy Merchant Bank, majority owned by the state pension fund, failed in part because of politicians' misgivings.)

The situation could change if Ghana’s central bank increased minimum capital requirements. There is talk in Accra of minimum capital requirements going up from 60m cedis ($29m) to 100m cedis soon. Several analysts think many small banks would be forced to put themselves up for sale if that happened.

But others disagree, saying the central bank, which has shown plenty of willingness to grant new licences in recent years, has no intention of forcing consolidation upon the banking sector. They argue, moreover, that even if the central bank did impose new capital requirements, it would be flexible with its deadline to ensure that banks struggling to raise capital quickly enough would not be under much pressure to look for a buyer.

Yet the days of such rapid expansion could be numbered, thanks to tight monetary conditions and a recent slowdown in government spending. The Bank of Ghana – the country’s central bank – took action to strengthen the depreciating cedi and lessen liquidity in a system it felt was overheating by increasing its base rate from 12.5% to 15% and upping lenders’ reserve requirements in the first half of 2012.

This was followed by a further rate hike to 16% in May this year, partly because the currency was continuing to weaken. The government, meanwhile, has had to curb its expenditure and raise taxes since the start of the year to tackle the huge budget deficit, equivalent to 12% of GDP, it posted in 2012.

Biggest banks in Ghana

Slowing growth

Last year’s monetary tightening did little in itself to slow loan growth. Credit to the private sector increased 34% in 2012, according to Ghana's central bank. But bankers admit that the effect of higher rates is now starting to sink in, especially when combined with the government’s austerity measures, which are causing many companies to hold back on investments.

“We’ve seen a marked slowdown in economic activity this year,” says Kevin Wingfield, head of personal and business banking at Stanbic Ghana, a subsidiary of South Africa’s Standard Bank. “Demand in the market is not what we had anticipated. In the corporate space, we’ve seen strong local currency liquidity growth. Businesses are building their cash piles.”

For the moment, there seems little danger that Ghanaian banks’ high profitability – their average return on equity was more than 20% in 2012 – will drop significantly. Although demand for credit from businesses might be subdued, most lenders have taken advantage of rising government bond yields. Rates on three-month T-bills, having been less than 10% in late 2011, stood at 23% in June.

“With a few exceptions, the whole industry has packed money into government bonds,” says Winston Nelson, chief executive of securities firm African Alliance Ghana. “The amount invested in government paper has grown more than the amount invested in loans, on a percentage basis.”

Some lenders still expect their loan books to increase quickly in 2013. UT Bank, a specialist in servicing small and mid-sized businesses, is among them. So is GCB, which forecasts credit growth of 30% to 35%, although this is partly due to it wanting to raise its low loan-to-deposit ratio of about 40%.

But with interest rates so high, other banks will be wary about lending to the private sector and hold back from putting their excess liquidity into risk assets. “[High interest rates] limit [banks'] desire to be innovative and creative, and serve the private sector,” says Keli Gadzekpo, head of Databank, a local investment bank. “No banking executive is going to look at the low-lying fruits and then say to his board and shareholders: ‘We would make so much money if we lent it to the government, but we’re instead going to risk it in the private sector’.”

Financial inclusion

Ghana’s base rate, which has not been in single digits at any time over the past decade, is partly blamed by analysts for the country having a loans-to-GDP ratio of just 17%. This figure is less than half that of Kenya (38%), which has a similar-sized economy, but lower interest rates. It is also one of the reasons for Ghana’s hefty unbanked population.

“If you look at the population of 25 million, it would appear that just over 4 million people are banked,” says Stephen Kpordzih, managing director of state-owned Agricultural Development Bank. “We still have a huge population without banking services of any sort.”

Another reason for these low levels of financial inclusion is that few lenders concentrate much on rural areas, where half of Ghana's population lives. Most tend to target wealthier customers, who are typically based in cities and towns. Yet some banks are trying to get around the problem that opening branches in rural regions is expensive and often does not deliver the required returns. In April, UT Bank unveiled ‘banks on wheels’ – vans that offer full banking services, including the ability to withdraw and deposit money, apply for loans and make international transfers. So far it has two of these, which will travel around the country, but it intends to introduce eight more.

“The beauty of it is that while it’s not economically viable to put a branch in a rural community, you can go there with these mobile branches,” says Prince Kofi Amoabeng, UT Bank’s chief executive. “Having one of them is like having four normal branches.”

Ghanas banks show low penetration compared with other markets

Demand for credit

Even though Ghana’s urban areas are intensely competitive from a banking perspective, they still present plenty of opportunity. Thanks to booming economic growth in recent years, the country’s middle class is rising rapidly. And even with interest rates well into double figures, demand for consumer credit will increase, say bankers.

Much of GCB’s asset growth this year is expected to come from unsecured salaried loans to individuals. Plenty of other big banks are also targeting people in formal employment. “High interest rates impact the corporate sector a lot more than the consumer sector, in which people borrow relatively small amounts [with fairly short tenors],” says Mr Dornoo of GCB.

Longer term loans, such as mortgages and car loans, are a different matter. The mortgage market is small, and many institutions will only provide dollar loans, which carry a far lower rate of interest than cedi loans, but usually require the borrower’s salary to be paid in the US currency, thus ruling out all but a small minority of Ghanaians.

Bankers say interest rates need to be in single digits before cedi-based mortgages become common. Stronger property ownership rights are needed too. “A mortgage market won’t develop in Ghana until we solve the problem of mortgage registration and [disputes over] land titles,” says Gilbert Hie, head of Société Générale Ghana, a subsidiary of the French bank. “This is a big obstacle. The other one is the level of interest rates. How can someone borrow for 10 years at more than 20%?”

Holding back progress?

Ghana's banks are also making efforts to encourage electronic banking. Most offer mobile banking, while several are starting to introduce point-of-sale terminals. Bankers believe that these measures will help to reduce their costs, lessen their reliance on branches and decrease the prevalence of cash transactions. But they also admit that change will only happen gradually, particularly when it comes to convincing Ghanaians to use cards.

“There is a low card uptake. Moreover, people just don’t use their cards when they do have them. You can go to big retailers and you’ll struggle to find one out of five customers using cards. They still prefer cash,” says Stanbic’s Mr Wingfield. “There’s a lot going on in the electronic banking space. But it will take a while for it to catch on.”

Ghana’s banks face other problems common to sub-Saharan Africa. Poor infrastructure means they have high operating costs, while the absence of a proper addressing or national identification system makes them wary of supplying credit to new customers (the recent establishment of credit bureaux has helped, however).

Finding skilled staff presents more challenges. “The growth of the banking sector has been far ahead of investment and development in human capital,” says Mr Kpordzih. “You see people with limited knowledge and yet they occupy very sensitive positions. The decisions they make affect the stability of their institutions.”

Healthy picture

However, for all these concerns, Ghana’s banks are in a strong position. A tight monetary environment might stifle their loan growth in the short term, but they have juicy government bond yields to fall back on. And few believe that today’s interest rates will lead to substantial pain in the form of rising non-performing loans (NPLs). The country’s NPL ratio, which is about 14%, is tall even by regional standards. But it has fallen in recent years. And given that the industry’s capital adequacy ratio stands at 19%, well above the Bank of Ghana’s floor of 10%, most banks are well cushioned should the ratio creep up again.

Moreover, bankers in the capital Accra are largely confident that policy-makers’ efforts to strengthen the currency and curb spending will produce quick results, allowing them to start loosening monetary and fiscal conditions within the next 12 months.

Ghanaian banks are thus making investments with the long term in mind. Stanbic and Société Générale will both move into modern new headquarters by the end of this year. As with other banks, they are expanding their branch networks, which, despite the growing importance of electronic banking, are still seen as crucial to maintaining market share. Some lenders are looking to raise equity to fund their expansion, including Agricultural Development Bank, which hopes to launch an initial public offering during 2013.

Being positioned in one of Africa’s fastest growing and most politically stable countries will lead to many opportunities for Ghana’s banks in the coming years. Competition may be rife (see box) and the near-term future challenging, but their longer term prospects look highly promising.

Was this article helpful?

Thank you for your feedback!

Read more about:  Africa , Ghana