A Recapitalized Banking Sector a New Breeze for Value Creation

CENTRAL UNIVERSITY UNIT FOR FINANCIAL STUDIES (CUUFIS)

A Recapitalized Banking Sector a New Breeze for Value Creation.

BANKING SECTOR LEAGUE REPORT 2019 EDITION

A Recapitalized Banking Sector a New Breeze for Value Creation.

Benjamin Amoah, Ph.D Lecturer, Central University Business School Lead Contributor, CU UFIS

Gloria Clarissa O. Dzeha, Ph.D Lecturer, Central University Business School Contributor, CU UFIS

Abel M. Agoba, M.Phil Lecturer, Central University Business School Contributor, CU UFIS

Anthony Amoah, Ph.D Senior Lecturer, Department of Economics, Central University. Contributor, CUUFIS Philomina Afua Odi Mintah, M.Phil Lecturer, Department of Languages, Central University. Contributor, CUUFIS

Evans Sokro, Ph.D Senior Lecturer, Central University Business School Contributor, CU UFIS

ABOUT US

CENTRAL UNIVERSITY UNIT FOR FINANCIAL STUDIES (CUUFIS)

Introduction

Every economy’s growth and development is invariably driven by its financial sector. Ghana’s financial sector can be described as a frontier financial sector, heavily influenced and driven by the banking industry. As the economy grows within the middle income economy classification, the role of the financial sector in the economy becomes more pronounced, especially as global integration of financial market assumes higher levels. These developments would demand a financial sector that encircles the needs of all market participants in the financial market within a stable democratic environment. It is envisioned that the financial markets around the globe will be characterized by innovations, increased integrations, dynamism, complexities, vulnerabilities and increased consumer demands and expectations in the years to come. A consequence of these developments would be the need for research and training assistance beyond academic requirements. This support would be a blend of scientific inquiry with a practitioner problem solution package. Central University Unit for Financial Studies (CUUFIS) is a unit at Central University. CUUFIS is a not-for-profit research center conducting independent, non-partisan and impactful scientific and practitioner oriented research on issues that are important to stakeholders of the financial services industry and critical to the development of the financial market in Ghana and beyond. CUUFIS is positioning itself in the financial services sector as a provider of cutting-edge research output with related assignments to aid the development of the financial market, survival of financial institutions, to inform consumers of financial services and products, and to influence appropriate policies. CUUFIS dedicates an appreciable amount of resources to investigate long-term research questions that require commitment over an extended period to complete. However, we also identify research questions that are short-term in nature and relevant to the immediate needs of financial institutions, consumers of financial services and the economy at large. Our Mission CUUFIS exists to provide independent, practical and problem solving academic research output that focuses on the financial services industry. Our Vision Become an independent world class research centre relevant to stakeholders in matters relating to the financial services industry and a reference center for international stakeholders with similar interest in Ghana, the West African sub-region and beyond.

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Our Goal CUUFIS seeks to be a world class center for innovative research, training in financial studies and advocacy in financial issues relevant for all participants on the financial market. Our Symbol

Ese ne tekrema is an Akan Adinkra symbol the literary translation in English is the teeth and the tongue. The symbolic meaning is friendship, interdependence, advancement, progress and strength in unity. Our relationships and core values at CUUFIS is captured in the Ese ne tekrema adinkra symbol.

Our Method  Undertake independent research work on the financial services sector.  Create a pool of researchers with interest in finance and banking to share research ideas and collaborate in research assignments.  Collaborate with other global partners in the area of financial studies.  Create a thriving spirit of camaraderie among researchers of the center.

Our Core Values - CICIRE  Commitment - center members and researchers are dedicated to getting results and output within the mission of CUUFIS.  Innovation - CUUFIS creates an enabling environment and freedom for researchers to identify emerging research questions that position the center as a leader in financial studies.  Collaboration- members work in teams that take into account individual members’ skills, interests and strengths, providing opportunities for learning and friendship to take place within the CUUFIS family.  Integrity - our researchers undertake assignments with the expected ethical and professional standards, and present unaltered results and unbiased analyses.  Relevance - CUUFIS strives to be of importance to all stakeholders within the financial sector space by using our research to address pertinent issues in an impactful and practical manner.  Excellence - at CUUFIS we make every effort to produce high quality output in all our research and related assignments.

Our Relationships CUUFIS has two main target groups: industry players within the financial sector and the government. The major medium employed to reach these groups is through our research findings and research recommendations. We are also open to relationships with domestic, international partners, other research institutes and centers around the globe with an interest in the financial services industry.

CUUFIS

Research

Domestic & International Partners INDUSTRY GOVERNMENT

CUUFIS Relationship

Our Contributors  Researchers from departments within Central University and researchers from other tertiary institutions and research centers around the globe are welcome to join CUUFIS.

Our email contact: [email protected] Our website: www.central.edu.gh/203

ABOUT THE AUTHORS BENJAMIN AMOAH, Ph.D Lecturer, Central University Business School Lead Contributor, CUUFIS Email: [email protected] / [email protected]

Benjamin Amoah is a lecturer at the Department of Finance, Central University Business School. He holds a PhD in Finance from the University of Ghana. At Central University, Ben works as a lecturer in Banking and Finance at the undergraduate and graduate Master of Business Administration (MBA) level. He lectures Financial Markets, Credit Management, Treasury Management, Insurance, Advanced Corporate Finance and Money and Banking. Professionally, Ben is a Ghana Stock Exchange certified securities professional and also a member of the Association of Certified Chartered Accountants (ACCA-UK). Before joining Central University Ben worked as an operations processor at the International Payment Services division of Barclays Bank of Ghana. Ben’s research interests include financial institutions management, financial market fraud issues, investment management, financial literacy, efficiency of financial institutions and retirement planning. He has presented a number of seminars and conference papers both on international and local platforms including African Finance Journal Conference, Herrenhausen Symposium in Hannover, Germany, African Studies Center Tokyo University of Foreign Studies, and at the Kyoto University. He has published articles and book chapters in reputable journals. GLORIA CLARISSA O. DZEHA, Ph.D Lecturer, Central University Business School Contributor, CUUFIS Email: [email protected] /[email protected]

Gloria Clarissa O. Dzeha is a lecturer in Finance at the Central Business School, Central University in Ghana. Her research interest is in Development Financing- Remittances, Foreign Direct Investment, International Capital Flows, Central Bank Independence and institutional Quality, Monetary Policy, Economic Growth and Development, Investment Banking and Corporate Governance. Gloria Clarissa lectures courses both at the undergraduate and graduate levels. She taught courses including Investment Management and Risk, Treasury and Risk Management, Financial Markets and Institutions, International Finance, and Managerial Economics. Her publications are in reputable Journals online. ABEL MAWUKO AGOBA, M.Phil Lecturer, Central University Business School Contributor, CUUFIS Email: [email protected] / [email protected]

Abel Mawuko Agoba is a young budding academic professional, with great interest in imparting knowledge and conducting high level academic research in the fields of banking, accounting and finance. He currently is a full time lecturer at the Department of Finance, Central University. Abel lectures Financial Management of Banks; Banking Operations and Ethics; Microfinance; International Finance; Electronic Banking and Innovations and Elements of Banking.

Abel’s academic and research interests are Small and Medium Enterprises (SMEs) Microfinance, Credit Management, Corporate Finance, Financial Development, Financial Inclusion, International Finance, Risk and Insurance, Central Bank Independence, Monetary Policy, Capital Structure and Institutional Quality. Currently, a PhD Finance Degree candidate at the University of Ghana Business School, his approach to teaching is to encourage student participation, understanding and ability to apply what is learnt to real life situations. He has a strong work ethic of hard work, dedication, honesty and good human relations with colleagues and students. Mr. Agoba is also a dedicated Christian with interest in youth work, and a proud member of the Institute of Chartered Accountants Ghana. Abel has authored and co-authored six (6) journal articles and two (2) books for the university’s distance education program. ANTHONY AMOAH, Ph.D Senior Lecturer, Department of Economics, Central University. Contributor, CUUFIS Email: [email protected] / [email protected]

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Anthony Amoah is an applied development economist and a research consultant. He has taught undergraduate and postgraduate courses mainly at University of East Anglia (UEA), UK and at Central University (CU), Ghana, where he still serves as a Senior Lecturer. He has vast experience in teaching, researching and mounting of academic courses. He has most of his publications in high profiled journals hosted by Elsevier, Emerald, Springer, Inderscience among others. He is a member of the Royal Economic Society, UK; The European Association of Environmental and Resource Economists (EAERE); International Water Resources Association (IWRA/IWA) and Green Economists Institute (GEI). PHILOMINA AFUA ODI MINTAH, M.Phil Lecturer, Department of Languages, Central University. Contributor, CUUFIS EMAIL: [email protected] / [email protected]

Philomina Odi Mintah is a lecturer at Central University, Ghana and has been lecturing undergraduate students since September 2012 in the Department of English. She holds a B.A in English and History, MPhil in English and currently pursuing her Ph.D. in English, all at the University of Ghana. The courses she teaches include African literature, American literature, English Literature (poetry, play, and novel) from 15th Century to 20th Century, English language and Writing Skills. In addition, she has taught English Proficiency to Francophone Students from West African Countries – Togo, Benin, Niger, and Cote D'Ivoire and to Spanish and Portuguese speaking expatriates from Brazil, Spain, Chile, Bolivia, and Portugal. She is a member of the African Studies Association of Africa (ASAA), African Literature Association (ALA), International Society for the Study of Behavioural Development (ISSBD) and Women in Tertiary Education (WITE). Her research interests are in African literature with a focus

viii on slavery, colonialism, and post-colonialism; American and Diaspora Literature, Gender and Feminist studies. She has published one academic essay on “Images of Women in Armah’s Two Thousand Seasons: A Thematic Study” in Revue Ivoirienne de Langues Entrageres. Vol. 11, which can be retrieved from http://rile-ci.net/numero11/06%20Philomina.pdf. Her second paper, “Akan Proverbs and the Social Construction of Gender” is underway. EVANS SOKRO, Ph.D Senior Lecturer, Central University Business School Contributor, CUUFIS Email: [email protected] / [email protected]

Evans Sokro holds a PhD in Human Resource Management from Federation University Australia. He was a recipient of Federation University Australia postgraduate research scholarship and a special overseas student scholarship award in 2014. Evans is currently a Senior lecturer and Head, Department of Human Resource Management at the Central Business School, where he teaches courses in HRM at the MBA and undergraduate levels. He is also a fellow, Institute of Human Resource Management Practitioners, Ghana. Prior to joining the Central University, Evans worked for two years as the human resource and administrative manager for Eden Tree Limited and Jescan Construction Limited respectively. His research interests include expatriation in sub-Saharan Africa, organisational culture and values, high work performance systems and human resource information systems. Evans has published in peer review journals and has presented papers at several conferences both locally and internationally. He is a reviewer for international peer review journals such as International Journal of Cross Cultural Management, African Journal of Business and Economic Research and European Management Review. He also serves on a number of committees at Central University.

MESSAGE FROM THE VICE CHANCELLOR

Introduction I applaud the initiative of our colleague faculty members in starting this Banking Report on the Banking and Financial Intermediation space in Ghana. It is a step in the right direction and consistent with the University’s drive to engage applicable research and policy advocacy.

Applicable Research In recent statements, I have articulated the view that academics at Central University must engage a research initiative I call ‘#Research-that-matters’. Our intent is that domiciled as we are in Africa, we (academics and researchers) who live and work on the continent, have a great responsibility and opportunity to carry out research and examine many of the issues, problems and triumphs of institutions, business and governments on the continent.

Our research efforts must be informed by and speak to our context as Johns (2006) advocates and must mirror the ‘the engaged scholar’ as Boyer (1990; 1995) so cogently argues. This drive is important for a number of reasons.

Many students and practitioners often find themselves reading and referring to theories, cases, examples, and research executed outside Africa. Many issues are yet unexamined. Let me give an example. In Ghana, we have resorted to ‘Management Contracts’ or pursued the ‘Outsourced Management’ option as a solution to mal-performing state sector organisations. In the mid-1990s, the then national airline, Ghana Airways, was run by Speedway, a UK Aviation company for about 3 years. In the early 2000s, the national telecommunications giant, Ghana Telecom was run by TMP - the Norwegian Telecom firm that specialises in telecoms turn around, for about 3 years. From 2006, the utility company Ghana Water was under the management of Aqua Vitens Rand, a Dutch/South African water firm. What are the business, organisational, strategic, etc. issues in outsourced management arrangements in Africa? There is hardly any documented history of indigenous business in Africa, for example, that traces locally owned business, lays out how the demise of some came about ,and examines the nuances of the pre- and post-colonial business and entrepreneurial class. Research is needed to inform public policy, social reengineering efforts and generally provide relevant exemplars in the cognitive space of those who make decisions. In 2017, the issue of the banking sector’s integrity and soundness came to a head with the collapse of Capital and UT Banks. This is the time for Ghanaian academics to research these and other cases and propose sound policy options devoid of the parochial specificity associated with the approach of regulator and/or central government. It would be a shame for Ghanaian academics to sit and have western scholars carry out such research and purport to be more expert about our problems and issues than we are.

It is therefore encouraging to have this maiden publication of a report on the banking sector by CU faculty. ‘#Research-that-matters’ has come on-stream and we look forward to even more cogent explication of socio-economic, political and other matters which matter to us in Ghana and Africa. Professor Bill Buenar Puplampu Vice Chancellor Central University

A FOREWORD

I am delighted to write this foreword for the maiden edition of the banking sector report not only because I am the pro-vice chancellor in charge of Academic but also because this research output fits into the vision of the Vice Chancellor‘s “research-that- matters” agenda. Further, this report aligns with my personal philosophy that academics should not only impact knowledge in the classrooms or labs where conditions are under control, but must attempt to contribute to change and push for improvement in systems and processes that exist outside the classroom environment. This report contains the performance assessment of banks, showing areas where banks need to improve. An additional feature of this report is its educational features on bank mergers and acquisitions, bank capital, human resource management and electronic banking which will certainly help readers appreciate the development in the industry. This report has many interesting findings that are valuable for considering in practice. In addition, other issues discussed present research areas and questions for research consideration. With this maiden issue, our journey of providing practical industry engagement and solutions has began. We are grateful to the members of faculty who contributed to the various themes of this edition report. Professor John Ofosu-Anim Pro-Vice Chancellor Central University

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ACKNOWLEDGMENTS

CUUFIS is grateful to the Vice-Chancellor and Pro-Vice-Chancellor of Central University, Dean of Central Business School, for hosting the Unit and enabling our work. CUUFIS is also thankful to Mr. George Clifford Yamson who liaised between CUUFIS and external stakeholders for the 2019 Banking Sector League Report.

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EXECUTIVE SUMMARY

The banking sector of Ghana in the years 2017 to 2018 has undergone noticeable reforms emanating from an asset quality review that took place in the year 2015. The reforms together with an industry clean up end ed with 23 banks from 34 banks. The banking industry now can be said to be on much bigger and on higher wheels to propel the economy to higher and an all-inclusive growth for the betterment of all stakeholders. We envisioned that reforms will be a regular feature of our financial industry space as demands in business models and funding will continue to match the changes and growth that will take place in the Ghanaian economy and the global economy at large. Confidence in the banking sector will continue to increase after the dip resulting from the reforms, as the Bank of Ghana reassure the public of its commitment to the enforcement of the banking law and insistence on good banking practices in addition to creating a conducive environment for financial innovation to thrive.

Our responsibility at the Central University Unit for Financial Studies (CUUFIS) as a stakeholder in the financial institutions' industry is to provide cutting-edge scientific and practical research output that contributes to building a strong financial services sector in Ghana. Our theme for 2019 banking sector league report “A Recapitalized Banking Sector a New Breeze for Value Creation”, is important because the whole essence of the reforms couple with new minimum capital requirement must be a win-win situation for all stakeholders of the banking industry and the Ghanaian public at large considering the colossal 7.25 percent of GDP fiscal cost of the banking sector reforms and clean up.

It will be a rip-off of the Ghanaian taxpayer and a dishonour to the players of the banking industry if we are presented with these same issues that brought these reforms in the not too distant future. While we maintain the view that financial sector vulnerabilities are common and show up from time to time in financial institutions management. The years ahead for the banking industry should be about value creation embedded in good banking practices. The regulator must be constantly at work, not to be woken up to work. Directors and management of banks must exercise a high duty of care in their decision making. Shareholders of banks should be assured that their funds are not being unnecessarily exposed in the quest for value addition. Depositors should be able to have a good sleep knowing their deposits are secured. The macroeconomic environment should make the servicing of credit facilities from depository institutions less expensive. The Ghanaian tax payer should pay his tax without even thinking of any banking sector bailout on the other side of the tunnel. On the whole the Ghanaian financial institutions' industry should be well-functioning, so it becomes a fearful thing to fall into the arm of any of the regulators.

What makes CUUFIS different is that we do not provide mainstream service within the financial services industry; instead we conduct research culminating in probing analyses of industry performance and educational overviews of financial topics, as captured in the number of pertinent issues that we cover in each edition. In this report, you will find in addition to the bank performance write up, an educational piece on Corporate Governance, Depository Financial institutions Stability, Shareholder’s Expectations and HR implication of CEOs in the aftermath minimum capital, Financial Literacy and Central Bank Independency. We believe this approach will meet the interest of practitioners within the banking sector of the economy, and also enrich the readers’

xiv understanding of issues pertaining to the banking industry both for the present and the future, considering the diverse stakeholder and readership base we have.

Our team of experts at CUUFIS who contributed to this report stand ready to engage and discuss the details of this report with any group of persons or interested parties.

Co-ordinator: CUUFIS

Table of Contents ABOUT US ...... iii Introduction ...... iii Our Mission ...... iii Our Vision ...... iii Our Goal ...... iv Our Symbol ...... iv Our Method ...... iv Our Core Values - CICIRE ...... iv Our Relationships ...... v Our Contributors ...... v ABOUT THE AUTHORS ...... vi MESSAGE FROM THE VICE CHANCELLOR ...... x A FOREWORD ...... xii ACKNOWLEDGMENTS ...... xiii EXECUTIVE SUMMARY ...... xiv WHAT IS IN THIS REPORT ...... xxiv THE CIB DESK ...... 1 THE IMPACT OF CORPORATE GOVERNANCE ON PROFITABILITY OF THE BANKING SECTOR ...... 2

CHAPTER 1: THE DEPOSIT TAKING INDUSTRY IN THE GHANAIAN ECONOMY...... 9 1.1 Introduction ...... 9 1.2 The Economy ...... 10 1.2.1 Review ...... 10 1.3 Debt-to-GDP ...... 12 1.4 Foreign Currency ...... 13 1.5 Money Market Rates...... 14 1.6 The Intermediation Market ...... 15 1.6.1 Deposit - Lending Rates ...... 15 1.7 Deposit Taking - Industry ...... 16 CHAPTER 2: BANKING INDUSTRY PERFORMANCE ...... 18 2.1 Order of Analysis ...... 18 2.2 Bank size ...... 18

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2.3 Deposit ...... 19 2.4 Loans ...... 21 2.5 Intermediation ...... 22 2.6 Interest Income ...... 24 2.7 Interest Income Decomposition ...... 24 2.8 Bank Interest Income Decomposition...... 25 2.9 Loan Interest ...... 26 2.10 Personnel Compensation ...... 27 2.11 Personnel to Assets ...... 28 2.12 Fee and Commission Income ...... 30 2.13 PROFITABILITY ...... 31 2.13.1 ROA ...... 31 2.13.2 RAROA ...... 33 2.13.3 ROE ...... 34 2.13.4 RAROE ...... 35 2.14. Net Interest Margin ...... 37 2.15 Asset Efficiency ...... 38 2.16 Asset Productivity ...... 39 CHAPTER 3: BANKING EFFICIENCY ...... 41 3.1 Introduction ...... 41 3.2 Technical efficiency ...... 41 3.3 Revenue Efficiency ...... 43 3.4 Cost Efficiency ...... 44 3.5 Profit Efficiency ...... 45 3.6 Overall Performance ...... 47 3.7 Regional Presence Profitability ...... 48 CHAPTER 4: INTER BANK EFFICIENCY ANALYSIS...... 50 4.1 Introduction ...... 50 4.2 Access Bank ...... 50 4.3 ADB ...... 51 4.4 Barclays Bank ...... 52 4.5 Bank of Africa ...... 53 4.6 CAL Bank ...... 54

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4.7 Ecobank ...... 55 4.8 FAB ...... 56 4.9 FBN ...... 57 4.10 Fidelity Bank ...... 58 4.11 FNB ...... 59 4.12 GCB ...... 60 4.13 GT Bank ...... 61 4.14 Republic Bank ...... 62 4.15 SCB ...... 63 4.16 SG Bank ...... 64 4.17 Stanbic Bank ...... 65 4.18 UBA ...... 66 4.19 Zenith Bank ...... 67 CHAPTER 5: DEPOSITORY INSTITUTIONS STABILITY IN GHANA; A MIRAGE OBJECTIVE FROM ONE REFORM TO ANOTHER...... 68 5.1 Introduction ...... 68 5.2 Financial Sector Reforms and Stability...... 71 5.3 Factors and Results of Bank Failure ...... 74 5.4 Conclusion ...... 77 CHAPTER 6: FINANCIAL LITERACY, A NECESSARY KNOWLEDGE AND SKILL TO POSSESS, WHO BEARS THE COST? ...... 78 6.1 Introduction ...... 78 6.2 What is financial literacy? ...... 79 6.3 Importance of financial literacy ...... 80 6.4 Ways to improve financial literacy ...... 82 6.5 Who bears the cost of improving financial literacy? ...... 82 6.6 Conclusion ...... 83 CHAPTER 7: SHAREHOLDERS EXPECTATIONS AND HR IMPLICATIONS FOR CEOS: THE AFTERMATH OF GHȻ 400M MINIMUM CAPITAL ...... 84 7.1 Stakeholders Expectations ...... 84 7.2 How can the Banks Create Value for Shareholders ...... 85 7.3 Implications for HR Managers ...... 88 CHAPTER 8: INDEPENDENT CENTRAL BANKS AND FINANCIAL SECTOR DEVELOPMENT IN AFRICA ...... 90

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8.1 Introduction ...... 90 8.2 Central Bank functions and Central Bank Independence ...... 93 8.3 CBI in Africa ...... 94 8.4 Stylized facts ...... 95 8.4.1CBI reforms ...... 95 8.5 Inflation ...... 98 8.6 Financial Development and the role of an independent central bank ...... 99 8.7 The impact of political institutions on the effectiveness of Central bank Independence ...... 102 8.8 Regression and Correlation Results ...... 104 8.9 Conclusion ...... 104 REFERENCE ...... 105 Appendix ...... 110

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TABLES

Table 1: Real GDP Performance ...... 12 Table 2. Ghana Cedi Exchange Rate ...... 13 Table 3 Deposit-Lending Rates ...... 15 Table 4. Licensed Banking and Non-Banking Financial Institutions ...... 17 Table 5: Bank Total Assets ...... 18 Table 6: Industry Deposit Share ...... 20 Table 7: Loans Created ...... 21 Table 8: Bank Intermediation on the Market ...... 23 Table 9: Bank Interest Income Make Up ...... 25 Table10: Industry Loan Interest ...... 26 Table 11: Bank Personnel Compensation ...... 27 Table 12: Bank Personnel Resource ...... 29 Table 13: Bank Fee and Commission Income ...... 30 Table 14: Bank Return on Assets ...... 32 Table 15: Bank Risk Adjusted Return on Assets ...... 33 Table 16: Bank Return on Equity ...... 34 Table 17: Bank Risk Adjusted Return on Equity ...... 36 Table 17: Bank NIM ...... 37 Table 18: Bank Asset Efficiency ...... 38 Table 19: Bank Asset Productivity ...... 39 Table 20: Bank Technical Efficiency ...... 42 Table 21: Bank Revenue Efficiency ...... 43 Table 22: Bank Cost Efficiency ...... 44 Table 23: Bank Profit Efficiency ...... 46 Table 24: Bank Overall Efficiency ...... 47 Table 25: Regional Presence Performance ...... 48 Table 26: State of the Microfinance subsector in Ghana ...... 73 Table 27. Major Events in the Depository Industry of Ghana ...... 74 Table 28: Recent Deposit Taking Institution Failures and Support ...... 75 Table 29: Financial Development in Africa, Other Developing and Developed Countries ...... 91 Table 30: Frequency of CBI reforms by country from 1970-2014 ...... 96 Table 31: Institutional quality in Africa ...... 101

Table 32: Institutional quality in Other Developing Countries ...... 101 Table 33: Institutional quality in Developed Countries ...... 101 Table 34: Corruption Perception Index ...... 102

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FIGURES

Figure 1: Corporate Governance Conceptual Framework ...... 6 Figure 2: Trend of Financial Soundness Indicators...... 8 Figure 3: Trend in GDP Growth Rates 1961-2014 & Banking Crisis impact ...... 10 Figure 4:Debt-to-GDP Ratio (2014-2018) ...... 13 Figure 5:Ghȼ exchange rate ...... 14 Figure 6: Trend of Money Market Rates ...... 15 Figure 7: Trend Deposit-Lending Rates Trend Deposit-Lending Rates ...... 16 Figure 8: Share of Interest Income ...... 24 Figure 9. Access Bank efficiency estimates ...... 50 Figure 10: ADB efficiency estimates ...... 51 Figure 11. Barclays Bank efficiency scores ...... 52 Figure 12: BoA efficiency estimates ...... 53 Figure 13:CAL Bank efficiency estimates ...... 54 Figure 14: Ecobank efficiency estimates ...... 55 Figure 15: FAB efficiency estimates ...... 56 Figure 16:FBN efficiency estimates ...... 57 Figure 17: Fidelity Bank efficiency estimates ...... 58 Figure 18: First National Bank efficiency estimates ...... 59 Figure 19: GCB efficiency estimates ...... 60 Figure 20: GT Bank efficiency estimates ...... 61 Figure 21: Republic Bank efficiency estimates ...... 62 Figure 22: Standard Chartered Bank efficiency estimates ...... 63 Figure 23:SG Bank efficiency estimates ...... 64 Figure 24: Stanbic Bank efficiency estimates ...... 65 Figure 25: UBA efficiency estimates ...... 66 Figure 26: Zenith Bank efficiency estimates...... 67 Figure 27. The structure of the Deposit Taking Financial Institutions Industry in Ghana .... 70 Figure 28. Trend of Deposit - Taking Financial Institutions in Ghana ...... 71 Figure 29. Reasons for Bank Failure in Ghana ...... 76 Figure 30: Broad Money (M2) as a percentage of GDP...... 92 Figure 31: Political Rights (rescaled 0-6), 1970-2016 ...... 93

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Figure 32: Number of CBI reforms from 1970-2014 ...... 96 Figure 33: Averages of CBI in Africa, Other Developing and Developed Countries ...... 97 Figure 34:CBI rankings in Africa ...... 98 Figure 35: Average Inflation Rates ...... 99

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WHAT IS IN THIS REPORT Current developments in Ghana’s financial services sector, particularly its depository institutions, are generating anxiety among stakeholders. This state of affairs demands the contribution of academics to present researched views on the industry and offer the public insights into how banks have performed and consider other current developments taking place in the banking industry. This research report is the second output from Central University Unit for Financial Studies (CUUFIS), which seeks to contribute scientifically to the development of a vibrant financial services industry in Ghana and beyond. In this report, we focus on the performance of banks for the period 2017 and 2018 and discuss pertinent issues such as Depository institutions stability, shareholder expectations of Bank CEOs, Financial literacy and Central Bank independence in Africa. Data for the performance and efficiency analysis for the sampled banks was sourced from published annual report.

It is our hope that this research report answers your curiosity on the current developments in the banking industry and provides some illumination on some important in banking. All suggestions for improvement or inclusion are welcome.

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THE CIB DESK

MR. CHARLES OFORI-ACQUAH, FCIB- CHIEF EXECUTIVE OFFICER, THE CHARTERED INSTITUTE OF BANKERS, GHANA Mr. Charles Ofori-Acquah is the Chief Executive Officer of the Chartered Institute of Bankers, Ghana. He holds a Bachelor of Arts Degree in Political Science from the University of Ghana, Legon and an Executive Masters in Governance and Leadership from the Ghana Institute of Management & Public Administration (GIMPA). He is an Associate of the London Institute of Banking and Finance (formerly Chartered Institute of Bankers, England) and a Fellow of the Chartered Institute of Bankers, Ghana.

He is an experienced Chartered Banker with over 20 years of demonstrable track record in the banking industry. He was the Executive Director, Business Development of (HFC Bank) now Republic Bank with responsibilities for crafting the bank’s policy and strategy for retail banking, implementing Board decisions within the bank’s approved policy limits for risks. He had oversight responsibility for Treasury, International Trade Services and Marketing Departments. He has been a Council Member, Executive Committee Member and a Member of the Ethics Committee of the Chartered Institute of Bankers, Ghana since 2011. He was also a Member of the Board of Directors of Republic Bank from 2012 to 2015 as well as Board Member of UG-Republic Bank Ghana Limited between 2012 and 2015. He has participated in a number of local and international trainings and conferences. These include Executive Development Programmes at Wharton Business School, University of Pennsylvania, USA, and Stanford Graduate School of Business, USA amongst others.

THE IMPACT OF CORPORATE GOVERNANCE ON PROFITABILITY OF THE BANKING SECTOR

BY CHARLES OFORI-ACQUAH, FCIB

Corporate governance is one of the topics that has gained considerable attention in recent times due to several contemporary mismanagement issues affecting the performance of organizations. In the banking industry, corporate governance is particularly important because of the risk of contagion where the collapse of one bank can affect others as well as the economy as a whole. For this reason, the banking sector requires more supervision than other companies. In a bid to stem the spate of bank distress, the Bank of Ghana took steps to ameliorate the situation in order to achieve financial stability of the banking sector by implementing banking reforms. Despite this intervention by the Bank of Ghana, the stability of the banking sector has been affected by poor corporate governance practices.

This write up holds the view that corporate governance significantly impacts on the performance of the banking sector because it is a value driver for efficiency of banks. It is recommended that the Bank of Ghana should diligently exercise its oversight functions to ensure strict compliance with the new corporate governance directive by ensuring that processes, structures and policies have been put in place by banks to minimize the losses as well as consolidate the gains the industry has made so far.

Introduction The concept of corporate governance involves the process of discharging corporate responsibilities in a manner that maximizes shareholders’ value and creates wealth (Okafor, 2011). It connotes the way in which an organization is managed, controlled and governed. In a sense, corporate governance examines the relationship between management, the board, shareholders and how these varied stakeholders operate within a framework of accountability and transparency (Adeola, 2003). The absence of good corporate governance is often blamed for the woeful performance of organizations. According to Ahmed and Hamdan (2015), there is a positive relationship between corporate governance and the performance of banks. However, notwithstanding the large body of empirical literature supporting the positive relationship between corporate governance and banking sector performance, Hutchinson et al (2002) and Bathala and Rao (1995) found a negative correlation between these two variables. Other authors such as Park and Shin (2003) and Singh and Davidson (2003) demonstrated the lack of relationship.

In spite of the conflicting evidence between corporate governance and profitability of the banking sector, it is generally recognized that inadequate corporate governance practices trigger corporate failures. OECD (2009) contended that the 2007 global financial crisis was attributed to failures

2 and weaknesses of corporate governance structures within the various institutions in Europe. Similarly, (Sanusi,2009) argued that the 2009 banking crisis, which contributed to the 2010 banking reforms in Nigeria was also as a result of poor corporate governance structures in the Nigerian banking sector. The growing necessity for deepening good corporate governance in banks and other financial institutions has therefore been necessitated by the lack of strong corporate governance culture. The collapse of the world’s giant financial institutions early in this millennium and more was largely attributed to corporate governance failures in these institutions (Zandi, 2009; Lahart, 2009; Faber, 2009). Banks with history of established corporate culture consistently record high and predictable growth rates and profitability. Thus, low growth rates that characterize some banks can be attributed to the non-existence of a well-established corporate governance culture in an organization (Lahart, 2009). The need to strengthen corporate governance, both in terms of the frameworks and the practices of financial institutions as well as the optimal use of resources, therefore, contributes positively not only to the banking sector but also the economy of a country (Black et al., (2014). On the contrary, an institution with poor corporate governance leads to sub- optimal performance, weak strategic directions and weak supervisory oversight. What makes the difference is proactive, good corporate governance and management to reduce the incidence of poor oversight, fraud, insider abuse and corruption. The quest for sound corporate governance standards and practices for financial institutions would protect the critical the interests of depositors, shareholders, management and directors and employees. In the wake of the collapse of nine banks in Ghana, namely, UT Bank, Construction Bank, Royal Bank, Sovereign Bank, Premium Bank, Unibank, Beige Bank, Capital Bank and Heritage Bank has brought to the fore the need for banks to improve their corporate governance policies, practices and structures. They should be able to effectively manage their assets and liabilities and put in place a robust lending delivery system to check connected lending and insider abuse. Banks are expected under the new corporate governance directive to implement the minimum standards as well as demonstrate that their governance arrangements are operating effectively and remain appropriate given their size, nature of business, complexity of activities, structure and systemic importance. This write up will provide a description of how corporate governance influences the profitability of the banking sector.

Why Corporate Governance is a big issue for Banks in Ghana The global financial crises of 2008 and 2009 brought to the fore the need to recognize effective corporate governance practices as a key driver of profitability of Banks (Rosenthal, 2011). That explains why the banking industry has witnessed phenomenal growth in the implementation of banking sector reforms to rid the industry of poor governance practices. Thus, regulation and supervision of banks have been recognized as two necessary ingredients that have the tendency to impact on bank’s profitability. Allen et al., (2010) contended that the implementation of good corporate governance policies will compel most banks to prioritize liquidity, solvency and risk management issues as well as shift their focus from managing customers’ deposits to effective management of the assets of the bank to generate profit.

One of the main causes of poor corporate governance within the Ghanaian banking sector is the lack of structures and strict adherence to policies, procedures and standards. As result of stiff competition, the banking business model has changed and this has affected how banks operate and

3 comply with policies and procedures. At best, corporate governance requires that banks adjust their strategies and adopt good business practices that will enhance their profitability. This piece is important because it brings new insights into the impact of corporate governance on profitability of the banking sector and contributes to knowledge on how banks can effectively leverage corporate governance to achieve quality profit to sustain their business.

The problems with governance in the banking industry can be seen in two dimensions. One dimension is that often times, banks do not adopt sound operational policies, procedures and practices and that tend to affect their profitability. Such an environment shows a deficit in good corporate governance regime. The fundamental reason for the growing interest in corporate governance in banking these days is borne out of the conviction that management of banks through proactive adherence to sound corporate governance principles, can reduce risk and enhance their operational efficiency. The failure of the banking system could lead to insolvency and this may result in lack of confidence in the whole banking system. Also, there are widespread issues of bad governance, excessive risk taking, financial misconduct, poor asset quality and weak controls which contribute to the mismanagement of banks.

The second problem confronting banks in Ghana relates to how to safeguard depositors and shareholders’ funds. When banks collapse, public trust is broken because the bank’s ability to pay depositors money is compromised whilst shareholders’ capital are put at risk. The general view is that unless appropriate corporate governance policies are implemented to reverse these challenges, the industry will continue to suffer from poor risk management, which may eventually lead to the collapse of some of the banks in the future (Al-Tammie, 2010).

Corporate Governance: Theory and Empirics Cloakroom Theory of Banking According to the cloakroom theory of banking (Cannan,1921), bank capital is a major determinant of bank profitability as it has a significant impact on lending. However, Okafor (2011) argued that in addition to the bank capital, issues of risk management come to the fore when it comes to the performance of the banking sector. This implies that banks should not only focus attention on improving their capital adequacy ratio, but they should also investigate the impact of corporate governance policies, structures and practices of profitability of the banking sector. The theoretical framework also explains the link between corporate governance and profitability of banks, particularly in the context of the contemporary developments in the Ghanaian banking sector.

Agency Theory According to Meckling (1976), the agency theory explains the relationship that exists amongst the key stakeholders in business. Agency problems arise because the principals cannot observe agents’ actions or lack information when agents undertake decisions, and because the agents take advantage of their positions and engage in actions that allow them to benefit personally at the expense of other stakeholders. Therefore, conflicting interest might arise between them and losses caused by these conflicts affect profitability. The implication is that managers often times act in a way that impacts negatively on shareholder aspirations. Managing the agency conflict has a direct impact on productivity and profitability of banks which will eventually lead to sustainability.

Accordingly, the agency theory has emerged as a dominant model in the financial literature since it explains the underlying relationships amongst the various stakeholders and how to manage the conflict to boost profitability of banks.

Corporate Governance and Bank Profitability In discussing the concept of corporate governance and its impact on profitability of the banking sector, two performance indicators, namely return on asset (ROA), and the return on equity (ROE) has been used. According to Bayed (2010) the key determinants of profitability are twofold; the internal factors which are bank-specific characteristics such as cost of operations tend to influence the financial performance of banks whilst corporate governance can also affect the profitability of a bank. These financial performance indicators are very important to the shareholders and depositors who are major stakeholders of banks. As the shareholders expect the banks to increase lending in order to give them maximum returns, depositors on the other hand, expect banks to invest their money in liquid assets so that they can get their money when needed. With profitability objective (shareholders want maximum returns) conflicting with that of liquidity (depositors want an unfettered access to their funds), sustainability is achieved when operations and performance management systems are positively aligned with good corporate governance. Grygorenko (2009) indicated that internal determinants of profitability are those factors that are influenced by the bank’s management decisions and policy objectives. According to him, the presence of these factors may affect the operational efficiency, marketing competencies, management competencies, motivation, quality and marketing strategy. The external factors is a domain that includes macroeconomic and industry related factors that the bank will have to adapt to, since these factors affect performance directly or directly.

There is much literature on the profitability of banks because of the contagion effects it has on the economic system. As a result, bank performance as measured by profitability is critical since it serves as a guide to financial stability and economic growth. The conceptual framework is presented below:

Non - performing loans Profitability Corporate

Governance Capital adequacy ratio

Liquidity ratio

Efficiency ratio Stability/Sustainability

Figure 1: Corporate Governance Conceptual Framework

Source: Author’s Own

Empirics Traditionally, banks have adopted an accounting approach such as ROE and ROA to measure profitability (Westerfield & Jordan 2008). Athanasoglou, et al., (2008) contended that capital adequacy ratio, liquidity ratio, efficiency ratio and non-performing ratios determine to a large extent the financial soundness of the banking sector. Similarly, Ahokpossi (2013) argued that capital adequacy has a positive relationship with profitability. He opined that sound corporate governance decisions lead to better credit decisions which will ultimately impact on the profitability of banks (Ongore & Kusa, 2013). In his view, a high non-performing ratio is symptomatic of poor corporate governance.

Banking regulation has a strong effect on bank’s profitability. Barth, et al., (1997) found out that regulation has a powerful effect on operations of banks and indicated that the regulator in any economy seeks to regulate every single banking activity. They suggested that the business model of banking is essentially based on risks and returns. This implies that banks that take higher risks will generate more profits than banks who take less risks. However, the essence of banking regulation is to safeguard depositors’ money and to create a robust banking sector through the adoption of sound corporate governance practices. Rime (2001) conducted a study and found out that regulation has serious effect on banks’ capital adequacy ratio. Whilst strict regulation brings about sanity in the banking sector, it also restricts capital to customers. Heid et al. (2004) conducted a similar study from 1993 to 2000 in the German banking sector and discovered that commercial banks that had a small capital base tend to reduce their risk exposure and engage in less risky business. Commercial banks that had higher capital adequacy engaged in more banking business with their buffer capital base.

Another dimension of the regulation and profitability looks at ownership structure. Laeven and Levine (2009) studied the effect of corporate governance on shareholders’ value and profitability. Their findings revealed that banks take more risks when their shareholders want more returns or dividends at the end of the year. Thus, regulation can influence the risk taking ability of banks, which will further determine their ownership structure and profitability. The study adds to the existing literature and deepens our understanding on how the governance structure determines the profit potential of a bank. It also helps to understand why banks take certain risks and the profits they generate.

Gompers et al., (2003) conducted a study to examine the effect of corporate governance on profitability of banks. The conclusion of the study points to a more significant result that for banks with shareholders that are active and participate in the affairs of their bank, profitability is higher than in those banks where management takes a dormant stance in the day to day affairs of their banks. Demsetz and Villalonga (2001) argued that there is no correlation between ownership structure and profitability. They conducted a study to assess 223 firms in the U.S.A and found that ownership alone does not necessarily affect profitability since other variables such as cost and revenues determine profitability. Saunders et al., (1990) studied bank ownership and bank profitability and indicated that bank regulation is required to manage risk. They discovered that managers in banking institutions should do more to separate investments from deposits. Banks must engage in activities that have the tendency to boost profitability whilst managing shareholder expectations. In doing so, banks must be guided by robust risk management and sound corporate governance culture. Their findings indicated that risks and returns are negatively related and that banks should mitigate their risks and streamline their operations before they can be profitable.

Trend of Financial Soundness Indicators of the Banking Sector The trend analysis of the key indicators for measuring the soundness of the banking sector has been depicted in Figure 2. The analysis indicates that banking efficiency ratio as measured by cost to income was extremely high from 2006 to 2012 and gradually improved from 2013 to 2018. Industry liquidity was on a consistent increase from 2006 to 2018. Other indicators such as return on assets, return on equity and capital adequacy moderately improved over the period.

100 90 80 Liquid Assets Core 70 Liquid Assets Broad 60 Return on Assets before tax 50 Return on Equity after tax 40 Capital Adequacy Ratio 30 Efficiency Ratio 20 10 Non-Performing Loans 0 2006200720082009201020112012201320142015201620172018

Figure 2: Trend of Financial Soundness Indicators. Source: Bank of Ghana Managerial Consideration The managerial implication of the study is that for banks to generate profits, they should look at their controls, risk management policies and operational processes. Given the same interest income, a bank that has good corporate governance regime will impact positively on its efficiency and will have a better net interest income than the other bank that does not take good corporate governance stance, thus increasing their operational inefficiencies and compromising their profitability and sustainability.

Again, the study makes very important implications for bank managers to appreciate the link between cost management, operational processes, sound corporate governance and profitability. Managers should understand the inseparable link between corporate governance and profitability of the banking sector and work towards contributing their quota to an enhanced corporate governance culture. In other words, the implications of the study are that if management should streamline their operational processes, credit delivery among others premised on a positive corporate governance culture will generate profitability in the medium to long-term.

Reflections From the findings of the study, it can be concluded that corporate governance impact on the profitability of the banking sector in Ghana. The involvement of key management in the implementation of the Bank of Ghana’s new corporate governance directive is critical for the attainment of profitability. Also we hold the view that efficiency ratio affects corporate governance and profitability of banks. Banks should adopt good corporate governance practices and structures that support efficient management of resources. The Board, management and employees should be trained to understand the triggers of good corporate governance, put policies in place at all levels and ensure strict compliance of same. Owners of banks must create the right environment for effective corporate governance to thrive in their institutions. This will enhance profitability and maximize shareholders’ value.

CHAPTER 1: THE DEPOSIT TAKING INDUSTRY IN THE GHANAIAN ECONOMY

1.1 Introduction

In the quest to clean up and strengthen their financial sector, the Bank of Ghana (BOG) commenced a recapitalization exercise. This came as a result of mismanagement and unavailability of the stated capitals. The mismanagement of funds and illegal use of the stated capitals of UT Bank and Capital bank prompted BoG to further look into all banks to ensure a robust financial sector. This led to the shutdown of the aforementioned banks and granted a takeover by GCB Bank.

It also resulted in the increase of the stated capital of banks to Ghȼ400,000, 000 of which a deadline was given until the end of 2018. As of 2019, Nineteen (19) Banks survived the recapitalization. These banks are: Access Bank, ADB Bank Ltd., Bank of Africa Ghana Ltd., Barclays Bank of Ghana Ltd., CAL Bank Ltd., Ecobank Ghana Ltd., FBN Bank Ghana Ltd., Fidelity Bank Ghana Ltd., GCB Bank Limited., Guaranty Trust Bank Ghana Ltd., National Investment Bank Ltd., Prudential Bank Ltd., Republic Bank Ltd., Societe Generale Ghana Ltd., Stanbic Bank Ghana Ltd., Standard Chartered Bank Ghana Ltd., United Bank for Africa Ghana Ltd., Universal Merchant Bank Ghana Ltd., Zenith Bank Ghana.

Thirteen (13) banks were merged after the recapitalization exercise. Out of the thirteen banks, seven (7) were merged into Consolidate Bank Ghana, two into First Atlantic Bank and four others (namely BSIC Ghana Ltd. And OminiBank Ghana Ltd merged into one; First National Bank Ghana Ltd and GHL Bank Ltd. also merged into another). These seven banks that constitute Consolidated Bank Ghana are: Heritage Bank Ltd., Premium Bank Ltd., Sovereign Bank Ghana, The Construction Bank Ghana Ltd., The Beige Bank Ltd., The Royal Bank Ltd., UniBank Ghana Ltd. Whereas, First Atlantic Bank and Energy Commercial Bank are now merged into First Atlantic Bank. Also, GN Bank Ltd. and Bank of Baroda Ghana Ltd. was downgraded and exited respectively.

The Ghana Amalgamated Trust (GAT) was established by government to support the recapitalization of five indigenous banks. The banks that came under GAT includes Agricultural Development Bank, National Investment Bank, Prudential Bank, Universal Merchant Bank and Omnic/BSIC Bank. The approval of a sovereign guaranteed bond by the parliament of Ghana provides the needed comfort for these banks to be considered as recapitalized by the Bank of Ghana (BoG). The CUUFIS 2019 annual banking sector league report is structured into 8 sections. Section 1 reviews the Ghanaian economy with particular emphasis on the financial sector while in Section 2; compares banking industry performance for the years 2017 and 2018. Section 3 is on bank efficiency. Section 4 is devoted to Depository institutions stability. Section 5 Shareholder’s expectation of bank CEOs after the new minimum capital. Section 6 is dedicated to financial literacy and Section 7 is on Central Bank independence in Africa.

1.2 The Economy 1.2.1 Review Scholars and practitioners who have been observing the nexus between the banking sector and the growth of the economy, the conclusion is that a healthy economy is an indication of a healthy banking sector, and the reverse is not debatable. For example, Figure 1 provides evidence that the 2008 global banking crises affected all economies in the world.

Figure 3: Trend in GDP Growth Rates 1961-2014 & Banking Crisis impact Source: (Amoah, 2016)

In recent times, the banking industry in Ghana has gone through what the industry players may describe as financial sector cleansing or financial sector reforms. Whichever way one may describe the banking sector’s recent experience, experts have argued that it was necessary towards building a robust financial sector that is well regulated (see Asiama & Amoah, 2019). In a broader perspective, CUUFIS (2018) argued that the overarching interest of the financial sector reforms was to protect stakeholders within the sector especially depositors. This, the report claims have been the key driver to increasing the minimum stated capital requirement from GHȼ120 million to GHȼ400 million. We admit that such reforms may have its excesses though, the merits (e.g. ability to absorb impacts of systematic risk, growth in industry’s assets, stronger and competitive beyond the local market) far outweigh the excesses.

Evidence from the World Development Indicators of the World Bank (2019), shows that the global economy grew by 3.15% in 2017. In 2018, the trend dipped marginally to 3.0%. This is expected to remain unchanged in 2019. However, the confluence of global risk such as growing financial, socio-political and environmental challenges still remain a scare to the sustainability in the global economic growth rates.

Other statistics from the Global Economics Prospects of the World Bank show that for 2018, Middle East & North Africa, Sub-Saharan Africa, Nigeria and South Africa annual percentage real GDP growth rate was estimated at 1.7, 3.0, 1.9 and 0.8 respectively. Ghana, on the other hand, recorded a real GDP growth of 6.3% in the same year. The IMF has forecasted that the Ghanaian economy will grow by 8.8 percent in 2019.

The Ghanaian economy saw signs of recovery from the 2016 to the 2017 financial year. However, provisional estimates from the Ghana Statistical Service (GSS, 2019) shows that this was not sustained in 2018 (see Table 1). In the year 2018, the Ghanaian economy recorded a real GDP growth of 6.3 percent compared to 8.5 percent in the year 2017. Showing a 2.2 percentage points decrease in the economy’s performance. The decrease stemmed from the performance in the various sectors of the economy. An interesting observation is that, growth in industry declined by 6.1 percentage points, relative to the other sectors, it contributed significantly to the growth in real GDP. The underlying reason remains the improvement in energy and relative stability in energy supply to industry. Unfortunately, financial and technical challenges have short-lived the expected gains from the industrial sector. It is therefore not surprising to expect a further dip in 2019 if the electricity supply remains unstable. To avert this trend, pragmatic steps are needed to provide the financial and technical support for the sector else the 2019 projected growth may remain a mirage.

In 2016, the agricultural sector witnessed a sharp rise in growth rate from 3.6 percent to 8.4 percent in 2017. This was partly attributed to government’s Planting for Food and Jobs (PFJ) campaign flagship initiative. It was expected that the agricultural sector will continue to experience positive growth which could propel growth in the other sectors of the economy. However, the expectation has suffered a setback as the estimate for 2018 shows a sharp decline to 4.8%. This perhaps could be attributed to inadequate preparation to harness the gains from the PFJ programme. The farming communities are still challenged by bad roads, inadequate storage facilities, access to ready market among others to harness growth in the sector. Nonetheless, projections in 2019 shows a significant recovery to 7.3%. Albeit, it is unclear whether this will be attained and remain sustainable going into 2020.

In theory, it is expected that a sustained growth in the agricultural sector will propel growth in the industrial sector. From 2013 to 2018, it can be observed that 2016 recorded the worst performance of -1.2 percent. However, in 2017, the growth in the oil and gas sector contributed significantly to the 16.7 percent growth in the industrial sector. Although estimates and projections in 2018 and 2019 respectively show a continuous decline in the sector, it goes without saying that the industrial sector’s growth still stands tall amongst the other sectors. If the one-district, one factory initiative is well supported by the PFJ initiative, Ghana can become a manufacturing hub for the African continent.

Over the period 2013 to 2018, there has been a downward trend in the services sector from a 10 percent in 2013 to a 2.7 percent in the year 2018. This was mainly fueled by financial and insurance activities. In the years 2017 to 2018, the Central Bank of Ghana embarked on governance and management reforms (popularly known as the Banking Sector Clean-up) as a way of reversing the trends in the sector. So far, the number of banks have reduced from 36 in 2017 to 23 in January 2019. The Bank of Ghana has reported that the reforms have produced higher capital adequacy ratios, declining non-performing loans, higher return on capital, and improved liquidity ratios. Forecast by the government suggests that the sector will experience a substantial growth of 6.1 percent in 2019. We expects these positive gains in the banking sector to transmit into real GDP through the provision of credit and financial service need the various sector of the economy. It is worth acknowledging that the trade-off that exists between agriculture, industry and services

11 would have to be managed if the economy is to be well diversified to manage shocks and shifts in the growth fundamentals of the economy.

Table 1: Real GDP Performance Real GDP Sector % 2013 2014 2015 2016 2017 2018* 2019† Agriculture 5.7 4.6 2.4 3.6 8.4 4.8 7.3 Industry 6.6 0.9 1.2 -1.2 16.7 10.6 9.7 Services 10 5.7 5.7 5.9 4.3 2.7 6.1 Real GDP Growth (incl. Oil) 7.3 4.0 3.8 3.7 8.5 6.3 7.6 Real GDP Growth (excl. Oil) 6.6 3.9 4.0 5.5 4.9 6.5 6.2 Source: BoG Annual Report, various editions. *GSS (estimates), 2019. †MoF, (2019) 1.3 Debt-to-GDP The debt to GDP ratio is an indicator to investors regarding a country’s ability to defray future debt. Consequently, the debt to GDP ratio affects the cost of borrowing and the returns on government bonds. Figure 1 shows that the annual public debt ratios between 2014 to 2018 was largely driven by external debt. The total external debt as a percentage of GDP increased from 51.2 percent in 2014 to 55.6 percent in 2015.The debt-to-GDP ratio stood at 56.8 percent in 2016 but declined marginally to 55.6 percent in 2017. However, the debt-to-GDP ratio which soared in 2018 was largely driven by the cost of the financial system clean-up coupled with the exchange rate depreciation which occurred towards the later part of December, 2018. The rebasing of the GDP by the GSS in 2018 necessitated the re-estimation of the public debt which stood at 57.9 percent with the bailout, and 54.7 percent without the bail out. The IMF fiscal Monitor report projects the debt-to-GDP ratio to reach 62 percent by the end of 2019. Fiscal discipline is needed especially towards an electioneering year to repose investors’ confidence in the economy, else non- performing loans may rise which is detrimental to the banking business.

57.9 56.8 55.6 55.6 51.2

2014 2015 33.2 32

29.6 2016 PERCENT 29.1 28.8 28.6 26

24.8 2017 22.5 22.4 2018

EXTERNAL DOMESTIC TOTAL PUBLIC DEBT DEBT DEBT

Figure 4:Debt-to-GDP Ratio (2014-2018)

1.4 Foreign Currency On the foreign currency front, the cedi continues to decline in value compared to the three major international currencies, the US dollar, the pound sterling and the euro. Table 2 shows the cedi’s exchange rates against the three major trading currencies over the period 2013 to 2018.

Table 2. Ghana Cedi Exchange Rate Year 2013 2014 2015 2016 2017 2018 Mean Std. Dev. Ghȼ / US $ 2.2000 3.2000 3.8000 4.2002 4.4200 4.8200 3.7733 0.9488 Ghȼ / British ₤ 3.6715 5.0000 5.6000 5.1965 5.9700 6.1710 5.2682 0.8994 Ghȼ / Euro € 3.0982 3.9000 4.2000 4.4367 5.3000 5.5131 4.4080 0.8982 Source: BoG Annual Report, various editions.

The highest volatility in the cedi exchange rates is against the US dollar with a standard deviation of 0.9488, followed by the pound sterling 0.8994 with a comparable stable deprecation against the euro. Figure 3 shows a downward trend of the cedi depreciation against these major currencies for the period 2013 to 2018. The continuous instability of the cedi value on the forex market would demand some commitment from bank treasuries to minimize their exposure to foreign exchange risk within the permit of the Banking Act.

2013 2014 2015 2016 2017 2018

Gh/US dollar Gh/Pound Sterling Gh/Euro

Figure 5:Ghȼ exchange rate

There is some evidence of a structural break in 2016, possibly an indication of the existence of political business cycle in an election year. The continual accumulation of trade deficit would imply that the depreciation of the cedi against these currencies is far from being over. The central bank should sustain its effort at reducing trade deficits in the long term if the cedi is to become stronger against its trading currencies. 1.5 Money Market Rates Figure 6 shows rates quoted on money market instruments have declined, indicating reduction of interest rates on the loanable funds market, all other things being equal. Although this is good news for businesses that source for funds from banks, non-interest income components of banks’ income would suffer from this if these rates continue to decline. Between 2015 and 2018, the indicative MPC rate has been high compared to Treasury bill rates. The inference from monetary authorities is that banks must remain liquid and solvent rather than to seek funds from the central bank as the MPC rates are more punitive for banks.

2013 2014 2015 2016 2017 2018

91-day Treasury Bill 182-day Treasury Bill 1-year Note MPC

Figure 6: Trend of Money Market Rates The government offered rates on Treasury bills for public funds was higher than the MPC rates until the year 2015, an indication of a change in policy for sourcing for funds from the public by the government. Part of the government strategy on the loanable funds market has been to mob up liquidity in the short-term with the 91-day treasury instrument offering lower rates than the other money market rates. This strategy attempts to support the postponement of consumption to the long term as implied from the higher rates on the 182-day and 1 year note, especially for 2016 and 2017. Thereafter, while the MPC keeps declining, there have been marginal increases in the three treasury instruments, however, approximately converges in 2018. A key driver of these instruments has been the inflation rate which declined to a single digit of 9.4 percent in 2018. The decline effect of these rates on banks suggests that they may have to consider other income alternatives aside the government instruments, however, the banks must be mindful of the risk in such pursuits. 1.6 The Intermediation Market 1.6.1 Deposit - Lending Rates All indicators in the deposit –lending rates in the year 2018 saw declines. The interbank lending rates declined from the 19.3 percent in year 2017 to 16.10 percent in the year 2018. Deposit rates which hitherto had been fairly stable, declined by 150 basis points in the 2018 to 11.50 percent as provided in Table 3. Lending rates also declined to 26.9 percent in the year 2018. The lending deposit spread also dropped to 15.4 averaged in the year 2018.

Table 3 Deposit-Lending Rates Rates % 2013 2014 2015 2016 2017 2018 Inter Bank Rate 16.3 23.9 25.3 25.3 19.3 16.1 Average Lending Rate 25.6 29 27.5 31.2 29.3 26.9 Average Deposit Rate 12.5 13.9 13 13 13 11.5 Lending - Deposit Spread 13.1 15.1 14.5 18.2 16.3 15.4 Source. BoG Annual Report various editions.

The decrease in bank spread is a good sign for borrowers from banks as this will imply a reduction in the cost of the cost of borrowing funds from banks. All things being equal this should reduce the cost of bank loans. Furthermore this reduction is an indication of an improved efficiency in the intermediation regime in the economy. The continuous reduction in spread will be good for the overall economy in the long run if only this trend will continue. Figure 7 is a trend of deposit- lending rates on the market for the period under review. There is an indication of a structural break in the year 2016.

Rates 15

0 2013 2014 2015 2016 2017 2018

Inter Bank Rate Average Lending Rate Average Deposit Rate Lending - Deposit Spread

Figure 7: Trend Deposit-Lending Rates Trend Deposit-Lending Rates 1.7 Deposit Taking - Industry

The number of universal banks at the end of 2018 was 23, with 19 successfully meeting the fresh Ghc 400 million capital requirement by 31st December. The government established the GAT to provide support five local meet the capital requirement. As at the time of preparing this report, the parliament of Ghana had given its approval for the issuance of sovereign guarantee bond to assist these banks meet the capital requirement. Table 4 provides a breakdown in the deposit- taking industry.

Table 4. Licensed Banking and Non-Banking Financial Institutions Institutions 2013 2014 2015 2016 2017 2018 DMBs 27 28 29 33 34 23 NBFIs 57 60 62 64 68 67 RCBs 140 138 139 141 141 144 MFIs 337 503 546 564 566 566 Credit Reference Bureau 3 3 3 3 3 3

On the non-banking financial institutions (NBFI) front, there was 1 exit reducing the number from 68 in 2017 to 67 in 2018. The rural and community bank (RCB) segment of the deposit taking industry saw 3 new entrants with RCBs increasing to 144 in 2018. The microfinance (MFI) segment saw no change, the year 2018 ended with 566 MFIs. The number of licensed credit reference bureaus has been 3 through the years 2013 to 2018.

CHAPTER 2: BANKING INDUSTRY PERFORMANCE

2.1 Order of Analysis We compare the industry performance in 2017 and 2018 as a gauge of the performance of the economy. We also compare the industry performance for the year 2017 and the year 2018. Further we conduct our analysis by comparing bank performance over the 2 year period 2017 and 2018 for each bank. We further discuss performance of the top 5 banks for the current year and the last 5 performance in the same manner. Intervening banks would have the same analysis approach but are omitted for the sake of brevity.

2.2 Bank size

We use total assets to capture bank size. Although in this case, we consider what is presented on the statement of financial position by each bank as its total assets, we do acknowledge that there are different measures for bank total assets, such as those that focus purely on earnings assets. For our purposes, total asset is made up of current and non-current assets. The higher the total assets, the bigger the bank size. We also expect larger banks to play a dominant role within the banking sector of the economy. Table 5 provides the details of the sample banks' size. The industry size from the sample banks increased by 7.82 percent in the year 2018, with an average bank size of GHȼ 4,680,973,717.39. The difference in size among the banks is much higher at 3.67 compared to 3.27 standard deviation for the year 2017. From the T-test value of 4.90, there is a difference in bank size between the years 2018 and 2017. The same conclusion is inferred from the Wilcoxon signed-rank test.

In the banking literature, bank size is measured by total assets, the size of a bank is expected to positively impact its performance especially from economies of scale and scope perspective. Interestingly there was no change in the position of the five big banks for the top seven, for the year 2018 compared to the year 2017 albeit with increase percentage, GCB came top with 12.62 percent of the industry asset size, ECOB was second with 12.41 percent, the third position was for BAR at 10.68 percent. FID ranked forth posting 8.33 percent while STAN came fifth with 7.36 percent.

Table 5: Bank Total Assets 2018 2017 BANK Size GHȼ % of Asset Rank % Diff Size GHȼ % of Asset Rank GCB 10,635,051,000 12.62 1 11.27 9,558,151,000 12.23 1 ECO 10,457,596,000 12.41 2 14.94 9,098,692,000 11.64 2 BAR 8,994,562,000 10.68 3 51.07 5,954,035,000 7.62 3 FID 7,015,823,000 8.33 4 30.45 5,378,048,000 6.88 4 STAN 6,205,018,000 7.36 5 17.9 5,263,154,000 6.74 5 SCB 5,961,495,000 7.08 6 24.74 4,778,984,000 6.12 6 ZEN 5,572,474,712 6.61 7 19.3 4,670,895,909 5.98 7 CAL 5,405,856,000 6.42 8 28.32 4,212,638,000 5.39 8

ADB 3,597,395,000 4.27 9 1.474 3,545,143,000 4.54 9 UBA 3,563,715,870 4.23 10 11.38 3,199,566,000 4.09 10 ACC 3,540,941,000 4.2 11 19.5 2,963,235,035 3.79 12 SG 3,431,366,392 4.07 12 23 2,789,742,286 3.57 13 REP 2,857,988,000 3.39 13 37.46 2,079,096,000 2.66 15 GT 2,283,761,988 2.71 14 21.87 1,873,877,215 2.4 16 FAB 1,845,862,768 2.19 15 8.412 1,702,640,843 2.18 17 BOA 1,258,376,114 1.49 16 -6.3 1,343,035,939 1.72 18 FBN 989,624,069 1.17 17 81.15 546,303,475 0.7 22 FNB 640,620,000 0.76 18 146.1 260,294,000 0.33 26 UMB 2,985,505,000 3.82 11 PBL 2,184,835,000 2.8 14 PREM 1,338,114,639 1.71 19 BSCI 668,965,471 0.86 20 OMNI 657,745,000 0.84 21 BARO 388,220,366 0.5 23 ENER 376,654,568 0.48 24 HERI 326,798,447 0.42 25 TOTAL 84,257,526,913 100 78,144,370,193 Mean 4,680,973,717.39 3,010,000,000.00 Std. Dev. 3.67 3.27 T-test 4.90 Pr(|T| > |t|) 0.0001 Signed-rank test -3.636 Prob> |z| 0.0003

The bottom five small banks in the industry in the year 2018 are GT, FAB, BOA, FBN and FNB recording 2.71, 2.19, 1.49, 1.17 and 0.76 percent respectively. This order is not different from that of the year 2017. With new minimum capital, the expectation going forward is that these small banks will deploy strategies that will make them grow their size, the benefits from this will be scale and scope economies.

2.3 Deposit

The deposit performance metric is a measure of banks’ ability to mobilize deposits compared to the overall industry deposit mobilized for the respective year. Banks mobilize funds in the forms of deposit from retail and wholesale suppliers of funds, from which loans are created. In Table 6, the industry experienced a decline in deposit of 6.60 percent in the year under review, this can be a result of the decline in confidence a ripple effect of bank failures and withdrawal of banking license by the central bank during the year 2018. It is expected that confidence in the banks will increase which will allure to increase deposit. The mean deposit was GHȼ 3,202,820,755 with variability of 3.92 compared to the previous year 2017 variability of 3.4. There exist no statistical difference in bank deposit between the year 2018 and year 2017 per the T-test of 1.3544 and its respective probability value. Same from the Wilcoxon signed-rank test.

GCB and ECOB ranked first and second in the year 2018, just as they performed in the year 2017. GCB recorded 14.46 percent, whiles ECOB posited 13.58 percent. BAR improved its position to third with 8.55 percent industry size. The fourth was STAN with 7.81 percent. FID come fifth with an industry deposit size of 7.77 percent.

Table 6: Industry Deposit Share 2018 2017 Bank Deposit GHȼ % of Dep RANK % Diff Deposit GHȼ % of Dep RANK GCB 8,334,997,000 14.46 1 0.10 8,326,376,000 13.49 1 ECO 7,831,578,000 13.58 2 9.34 7,162,706,000 11.6 2 BAR 4,928,210,000 8.55 3 8.12 4,558,046,000 7.38 4 STAN 4,501,390,000 7.81 4 27.31 3,535,783,000 5.73 6 FID 4,456,339,000 7.73 5 (3.96) 4,640,268,000 7.52 3 SCB 4,346,676,000 7.54 6 24.66 3,486,793,000 5.65 7 ZEN 3,434,249,638 5.96 7 (11.06) 3,861,183,115 6.26 5 CAL 3,156,843,000 5.48 8 (6.05) 3,360,017,000 5.44 8 UBA 2,696,264,876 4.68 9 15.76 2,329,271,203 3.77 11 ADB 2,586,265,000 4.49 10 (13.78) 2,999,561,000 4.86 9 ACC 2,563,142,000 4.45 11 (3.65) 2,660,151,000 4.31 10 SG 2,165,049,969 3.76 12 3.19 2,098,079,862 3.4 12 REP 2,161,420,000 3.75 13 25.13 1,727,365,000 2.8 14 GT 1,664,299,711 2.89 14 13.44 1,467,120,773 2.38 16 FAB 1,355,044,415 2.35 15 (6.40) 1,447,764,383 2.35 17 BOA 790,270,010 1.37 16 (28.14) 1,099,767,017 1.78 19 FBN 494,619,973 0.86 17 20.99 408,824,016 0.66 22 FNB 184,115,000 0.32 18 50.86 122,047,000 0.2 26 UMB 1,948,855,000 3.16 13 PBL 1,471,462,000 2.38 15 PREM 1,217,716,766 1.97 18 OMNI 546,976,000 0.89 20 BSCI 537,688,329 0.87 21 ENER 301,969,818 0.49 23 BARO 216,803,307 0.35 24 HERI 191,508,712 0.31 25 Total 57,650,773,592 100 61,724,103,301 Mean 3,202,820,755 2,370,000,000.00 Std. Dev. 3.92 3.4 T-test 1.3544 Prob value 0.1933 Signed-rank test -0.936 Prob> |z| 0.3491

The order of the last five banks in this category did not change from the year 2017 position. GT posited a 2.89 percent at the 14th place, FAB recorded 2.35 percent in the 15th position. Coming next was BOA with 1.37 percent, FBN was 17th with 0.86 percent, and the last was FNB with 0.32 percent of the industry size. 2.4 Loans

For the purpose of our analysis, loans in this report are loans and advances as presented in the statement of financial position of the respective banks. In the intermediation framework, loans are earning assets created by banks through the asset transformation process where banks assume liability from depositors and create assets, including loans. These loans can be short or medium- term loans. From Table 7, on the industry level, bank loans increased by 8.12 percent with an average loan portfolio of Ghȼ 1,423,972,861. There was a higher spread in loans among banks by 4.52 in the year 2018 compared to 3.36 in the year 2017. From the T-test value of 2.6001 and the probability value of 0.0187, we conclude that there exists a statistical difference in bank loans between the year 2018 and the year 2017. The same position with the Wilcoxon signed-rank test.

From deposit mobilized, banks are expected to principally create loans for borrowers and also earn income to cover the operational cost and report adequate return for providers of funds especially shareholders. The observation from Table7 is that there has been no positional change in the performance of the top five banks for the years 2018 and 2017 although there was an improvement in their score. ECO created 16.90 percent of the industry loan, placing first, followed by BAR at 12.50 percent, the third position was occupied by GCB with a score of 10.92 percent, STAN came forth registered 10.08 percent a score of 10.92 percent with CAL taking the fifth place.

Table 7: Loans Created 2018 2017 Bank Loans Ghȼ % of Loan Rank % Diff Loans Ghȼ % of Loan Rank ECO 4,123,153,000 16.09 1 53.52 2,685,759,000 11.33 1 BAR 3,204,859,000 12.5 2 23.60 2,593,012,000 10.94 2 GCB 2,799,041,000 10.92 3 33.33 2,099,330,000 8.86 3 STAN 2,584,735,000 10.08 4 37.87 1,874,757,000 7.91 4 CAL 2,428,002,000 9.47 5 30.98 1,853,674,000 7.82 5 SGG 1,665,284,201 6.5 6 18.14 1,409,551,517 5.95 6 SCB 1,446,695,000 5.64 7 4.40 1,385,696,000 5.85 7 FID 1,419,472,000 5.54 8 38.24 1,026,794,000 4.33 11 REP 1,175,066,000 4.58 9 45.08 809,926,000 3.42 14 ADB 1,068,814,000 4.17 10 (6.19) 1,139,356,000 4.81 8 ACC 815,559,000 3.18 11 (7.08) 877,675,000 3.7 13 ZEN 733,084,008 2.86 12 (8.90) 804,676,754 3.4 15 UBA 634,206,101 2.47 13 (42.28) 1,098,846,411 4.64 9 BOA 565,057,955 2.2 14 13.98 495,750,311 2.09 16 GT 424,714,417 1.66 15 7.13 396,464,980 1.67 17 FAB 387,230,774 1.51 16 55.02 249,797,797 1.05 19 FNB 84,633,000 0.33 17 196.77 28,518,000 0.12 25 FBN 71,905,033 0.28 18 7.79 66,706,038 0.28 24

UMB 1,081,744,000 4.56 10 PBL 925,815,000 3.91 12 BSCI 276,779,461 1.17 18 OMNI 174,724,000 0.74 20 BARO 143,319,409 0.6 21 PREM 89,952,288 0.38 22 ENER 88,813,014 0.37 23 HERI 21,506,526 0.09 26 Total 25,631,511,489 100 23,698,944,506 Mean 1,423,972,861 911,000,000.00 3.85 Std. Dev. 4.52 3.36 T-test 2.6001 Prob value 0.0187

Signed rank-test -2.286 Prob > |z| 0.0222

Three of the last five banks were in the same position order in the year 2018 as in the year 2017. BOA registered 2.20 percent of the loan is in the industry, GT came next with 1.66 percent, FAB followed at 1.51 percent. However, there was a positional change for FNB with an improved score of 0.33 percent in the year 2018. FBN maintained its 0.28 percent of industry loan created and ranked last in the year under review. The bank size, deposit and loans nexus is clearly established from the results so far, mostly big size banks, mobilize large deposit and end up creating large loan portfolio, the direct reverse for small banks. 2.5 Intermediation

Intermediation, the process whereby banks mobilize deposits and create loans out of them, is a major role played by banks in the economy. It is expected that banks, with their expertise, will succeed in carrying out this intermediation role in an effective and efficient manner by allocating loanable funds to the most productive borrower within the economy. The failure of banks to intermediate effectively and efficiently exposes depositors by locking up their funds and also charging standard rates to all classes of borrowers. From Table 8, the mean intermediation was 43.67 with a higher spread of 19.76 for the year 2018. There is evidence to show that the intermediation for the year 2018 and the year 2017 is different, this is inferred from the T-test value of 2.3012 and the probability value of 0.0343. The Wilcoxon signed-rank test leads to the same inference.

SG continued to lead the banking industry in Table 8, when it comes to creating loan out of deposit, the bank maintained its position in the year 2018 and improved its intermediation score to 76.92 percent, CAL improve four places to rank second with 76.91 percent, similarly BOA also improved to third position scoring of 71.50 percent. There was no position change for BAR but rather an improved intermediation score of 65.03 percent in the year 2018. STAN came fifth with 57.42 in the year under review, three places up from its performance in the year 2017.

Table 8: Bank Intermediation on the Market 2018 2017 Bank Intermediation Rank % Diff Intermediation Rank SG 76.92 1 14.50 67.18 1 CAL 76.91 2 39.41 55.17 6 BOA 71.5 3 58.61 45.08 11 BAR 65.03 4 14.31 56.89 4 STAN 57.42 5 8.30 53.02 7 REP 54.37 6 15.95 46.89 10 ECO 52.65 7 40.40 37.5 14 FNB 45.97 8 96.71 23.37 20 ADB 41.33 9 8.82 37.98 13 GCB 33.58 10 33.20 25.21 19 SCB 33.28 11 (16.26) 39.74 12 FID 31.85 12 43.92 22.13 21 ACC 31.82 13 (3.55) 32.99 15 FAB 28.58 14 65.68 17.25 23 GT 25.52 15 (5.55) 27.02 18 UBA 23.52 16 (50.15) 47.18 9 ZEN 21.35 17 2.45 20.84 22 FBN 14.54 18 (10.91) 16.32 24 BARO 66.11 2 PBL 62.92 3 UMB 55.51 5 BSCI 51.48 8 OMNI 31.94 16 ENER 29.41 17 HERI 11.23 25 PREM 7.39 26 Mean 43.67 37.99 Std. Dev. 19.76 17.41 T-test 2.3012 Prob value 0.0343 Signed-rank test -2.286 Prob > |z| 0.0222

The lower end of Table 8 show that FAB bettered its intermediation to 28.58 percent in the year 2018, GT recorded a 25.52 percent decreased from its intermediation score of 27.02 percent in the year 2017. The major change in intermediation was for UBA, registering more than 100 percent reduction in intermediation with a score of 23.52 percent in year 2018, plausible a change in

23 strategy in the deployment of its loanable funds. ZEN marginally improved is intermediation to 21.35 percent in the year under review with FBN scoring a decreased 14.54 percent in creating loans out of deposits and ranked last in the industry for this indicator.

2.6 Interest Income

Interest income is the principal income source for banks. In the banking business, interest income can be decomposed into two major groups: interest income from loans created during the year, including loans and advances to customers, and non-loan interest income from placement with other banks, cash and cash equivalents and investment securities. The decomposition of interest income for banks gives an indication of yields on investment products on the market. To avoid making bad loans some banks choose to pursue riskless investment on the market to protect depositors’ funds, a strategy that hurts business loan requests.

From the pie chart in Figure 8, the share of interest income for the banking industry is gradually becoming even, between loan interest income and non-loan interest income.

Figure 8: Share of Interest Income

There was a 23.53 percent reduction in non-loan interest income in favor of loan interest income of 42 percent in 2018. This can be attributed to declining investment rates on the market, making government instrument less attractive, hence banks are resorting to more loans and increase loan interest income. 2.7 Interest Income Decomposition

To appreciate the sources of interest income we decompose interest income to provide a good insight into interest income namely loan interest income and non-loan interest income. This measure gauges banks' strategy for interest income and its compliance with the banking principle of receiving deposits and creating loans. A higher weight in terms of loan income is the norm for banks, however, if the weight is in favor of non-loan interest income then, the indication is the

24 banks are drifting from their intermediation role to investment role. The reasons for this are many including, weak credit environment making credit business too risky, poor credit culture of borrowers and attractive investment rates on the market. Managers of the economy will have to observe this behavior of banks to understand how loanable funds permeates the economy for policy decisions. The mean loan interest income percent was 45.79 percent whiles non-loan interest income made up 54.21 percent for the year under review.

Table 9 provides a breakdown of bank interest income, SG ranked first recording 85.15 percent, followed by STAN in the second position with 78.38 percent of interest income coming from loans, ECOB recorded a 65.59 percent of interest income from loans in third position, whiles BAR posit a 62.16 percent at fourth and BOA 61.89 percent in fifth position respectively. In an inverse manner, these banks recorded non-loan interest percent of 14.85, 21.62, 34.41, 37.84 and 38.11 percent respectively.

2.8 Bank Interest Income Decomposition Table 9: Bank Interest Income Make Up BANK Loan Interest Income % Rank Non-Loan Interest Income % Rank SG 85.15 1 14.85 18 STAN 78.38 2 21.62 17 ECO 65.59 3 34.41 16 BAR 62.16 4 37.84 15 BOA 61.89 5 38.11 14 CAL 61.75 6 38.25 13 ADB 57.12 7 42.88 12 REP 56.87 8 43.13 11 ACC 45.17 9 54.83 10 GCB 43.02 10 56.98 9 UBA 37.65 11 62.35 8 SCB 34.62 12 65.38 7 FAB 29.92 13 70.08 6 FNB 29.64 14 70.36 5 GT 26.27 15 73.73 4 FID 20.54 16 79.46 3 ZEN 17.78 17 82.22 2 FBN 10.64 18 89.36 1 Mean 45.79 54.21

The bottom five banks are FNB with a percentage of loan interest income of 29.64 percent at the 14th position, GT recording 26.27 percent ranking 15th, FID was at the 16th position with 20.54 percent, ZEN recorded a 17.78 percent of loan interest income at the 17th position. FBN came last making 10.64 percent. Indirectly, these bottom ranked banks rank are the best five banks with respect to non-loan interest income, FBN made 89.36 percent of interest income from non-loan

25 sources at first position, ZEN came second in this regard with a score of 82.22 percent, FID ranked third with 79.46 percent. The fourth-place bank was GT with 73.73 percent, FNB registered 70.36 percent coming fifth in this order.

2.9 Loan Interest

Loans are banks’ principal income-generating activity. In the asset transformation process, banks mobilize deposit (liabilities) and transform these liabilities into loans (asset). In most instances, there is a trade-off between loan interest income and non-loan interest income. The size of the bank also matters in the generation of loan interest income. The industry level saw an increase in loan interest income of 9.14 percent, with banks making Ghȼ 253,171,678.92 on the average loan interest income. The variability among banks in loan interest income was higher at 4.57 in the year 2018 than that of the year before. The T-test value of 1.1273 and the signed-rank test value of - 1.328 shows that there is no evidence to show that differences exist in loan interest income for the year 2018 and the year 2017.

In Table 10 ECO reported 15.45 percent and GCB’s 12.79 percent of industry loan interest made it possible for these two banks to maintain their respective first and second position in the year 2018, just as it was in the previous year. BAR and CAL interchange their position in the year 2018, for their placement in the year 2017. BAR recorded 11.55 percent whiles CAL scored 10.47 percent of industry loan interest income. STAN came fifth with 9.45 percent of industry loan interest income an improvement over the year 2017 performance.

Table10: Industry Loan Interest 2018 2017 BANK Int on Loan loan int % Rank % Diff Int on Loan GHȼ loan int % Rank ECO 704,170,000 15.45 1 25.68 560,267,000 13.42 1 GCB 582,747,000 12.79 2 27.86 455,785,728 10.92 2 BAR 526,426,000 11.55 3 40.52 374,623,760 8.97 4 CAL 477,203,000 10.47 4 4.92 454,839,000 10.89 3 STAN 430,707,000 9.45 5 28.13 336,139,000 8.05 6 SGG 301,059,241 6.61 6 19.79 251,319,703 6.02 8 ADB 273,429,000 6 7 38.33 197,666,000 4.73 10 SCB 212,142,000 4.66 8 (2.66) 217,939,000 5.22 9 UBA 192,509,002 4.22 9 (44.50) 346,853,296 8.31 5 REP 179,024,000 3.93 10 (0.07) 179,157,000 4.29 12 ACC 171,505,000 3.76 11 (37.10) 272,645,000 6.53 7 FID 162,025,000 3.56 12 6.11 152,696,000 3.66 15 ZEN 123,638,339 2.71 13 (30.22) 177,185,265 4.24 13 BOA 80,731,012 1.77 14 55.31 51,980,765 1.24 18 GT 69,823,931 1.53 15 (27.49) 96,294,921 2.31 16 FAB 53,007,718 1.16 16 21.30 43,699,738 1.05 20 FNB 10,112,000 0.22 17 1,643.45 580,000 0.01 26 FBN 6,830,978 0.15 18 16.15 5,880,919 0.14 25

UMB 189,577,000 4.54 11 PBL 171,314,000 4.1 14 BSCI 53,945,844 1.29 17 OMIN 48,771,000 1.17 19 ENER 27,063,941 0.65 21 PREM 19,983,676 0.48 22 BARO 13,132,640 0.31 23 HERI 9,950,318 0.24 24 Total 4,557,090,221 9.14 4,175,552,095 Mean 253,171,678.92 5.56 39.87 181,000,000 4.34 Std dev 4.57 3.85 T-test 1.1273 Prob value 0.2753 Signed-rank test -1.328 Prob > |z| 0.1841

The last five banks are BOA, with 1.77 percent, GT 1.53 percent, FAB 1.16 percent, FB 0.22 percent and FBN 0.15 to place 14th to 18th respectively.

2.10 Personnel Compensation

We capture personnel compensation using personnel expense recorded in the income statement of the banks. These expenses include items such as wages and salary, medical expenses, training expenses, social security contributions, pensions and other staff benefits. There was a marginal decline 0.32 percent in industry personnel compensation which can be attributed to the layoff of bank staff emanating from the revocation of the license by the central bank. It must be noted in Table 11, on the average personnel compensation increased to Ghȼ 139,209,224.11, with a commensurate increase in variability of 4.58 in the year 2018. There is no evidence to suggest that personnel compensation was statistically different between the year 2018 and the year 2017 as inferred from the T-test value of 1.7319 with its matching probability value. This conclusion is no different from the Wilcoxon signed-rank test.

The result presented in Table 11 shows that there has been no change in the ranking of the top five banks in respect to compensation for employees. GCB is the best bank in 2018, with 17 percent of the industry's personal resource score, ECO come second posting 15.12 percent, STAN with 9.03 percent, BAR made 8.96 percent at the fourth place whiles ADB record 7.23 percent in personal resource at the industry level.

Table 1: Bank Personnel Compensation 2018 2017 Bank Labour GHȼ % of Indus Rank % Diff Labour GHȼ % of Indus Rank GCB 425,962,000 17 1 17.41 362,807,000 14.43 1 ECO 378,839,000 15.12 2 10.41 343,108,000 13.65 2 STAN 226,192,000 9.03 3 (28.11) 314,622,000 12.52 3

BAR 224,429,000 8.96 4 9.44 205,067,000 8.16 4 ADB 181,232,000 7.23 5 8.49 167,052,000 6.65 5 SCB 165,048,000 6.59 6 6.96 154,308,000 6.14 6 FID 155,791,000 6.22 7 36.06 114,502,000 4.56 7 CAL 122,308,000 4.88 8 22.00 100,255,000 3.99 9 SGG 116,975,473 4.67 9 16.38 100,512,163 4 8 REP 93,026,000 3.71 10 16.53 79,829,000 3.18 10 ZEN 87,645,809 3.5 11 38.03 63,497,940 2.53 13 ACC 66,554,000 2.66 12 6.36 62,576,000 2.49 14 FAB 53,750,202 2.15 13 11.17 48,350,962 1.92 15 UBA 49,997,313 2.00 14 11.43 44,869,080 1.78 16 FNB 48,104,000 1.92 15 35.87 35,405,000 1.41 18 GT 45,495,279 1.82 16 31.81 34,514,819 1.37 19 BOA 41,598,842 1.66 17 10.74 37,563,143 1.49 17 FBN 22,818,116 0.91 18 12.02 20,369,561 0.81 22 PBL 73,371,000 2.92 11 UMB 63,620,000 2.53 12 HERI 23,278,899 0.93 20 BSCI 21,430,177 0.85 21 OMNI 18,754,000 0.75 23 PREM 13,146,376 0.52 24 ENER 8,948,403 0.36 25 Industry 2,505,766,034 2,513,743,223 Mean 139,209,224.11 43.96 96,700,000.00 Std. Dev. 4.58 4.11 T-test 1.7319 Pr(|T| > |t|) 0.1014 Signed-rank test -2.940 Prob > |z| 0.0033

On the lower end of Table 11 UBA placed 14th with 2 percent industry personnel resources, followed by FBN with 1.92 percent GT comes in at 1.82 percent. BOA maintained its 17th position for both years with a 1.66 percent score. The last bank was FBN making 0.91 percent of industry personnel resources.

2.11 Personnel to Assets

Personnel resources to assets considers the value of total assets made available to personnel. It is expected that banks that commit higher levels of total assets to employees would benefit by employees contributing more to the overall success of the bank. The results in Table 12 reveals that average industry assets made available to personnel were 3.09 percent in the year 2018. The variability was lower at 1.44 compared to 2.53 in the year 2017. Furthermore, there is no statistical

28 evidence that the year 2018 personnel resources were different from that of the year 2017, this is gleaned from the T-test value of -1.6775. The Wilcoxon signed-rank test gives the same conclusion.

FNB maintained its first position in the year 2018 with 7.51 percent of personnel resource to asset albeit a lower score. ADB improves to second place with 5.04 percent, GCB came third with 4.01 percent STAN reduced its personnel resource to asset to 3.65 percent in the year 2018, similar to ECO with 3.62 percent with a fifth place for the year under review compared to the year 2017.

Table 2: Bank Personnel Resource 2018 2017 BANK Personnel to Assets% Rank % Diff Personnel to Assets% Rank FNB 7.51 1 (44.78) 13.6 1 ADB 5.04 2 7.01 4.71 4 GCB 4.01 3 5.53 3.8 6 STAN 3.65 4 (38.96) 5.98 3 ECO 3.62 5 (3.98) 3.77 7 SGG 3.41 6 (5.28) 3.6 9 BOA 3.31 7 18.21 2.8 16 REP 3.25 8 (15.36) 3.84 5 FAB 2.91 9 2.46 2.84 15 SCB 2.77 10 (14.24) 3.23 12 BAR 2.5 11 (27.33) 3.44 10 FBN 2.31 12 (38.07) 3.73 8 CAL 2.26 13 (5.04) 2.38 17 FID 2.22 14 4.23 2.13 20 GT 1.99 15 8.15 1.84 22 ACC 1.88 16 (4.08) 1.96 21 ZEN 1.57 17 15.44 1.36 24 UBA 1.4 18 (7.28) 1.51 23 HERIT 7.12 2 PBL 3.36 11 BSCI 3.2 13 OMNI 2.85 14 ENER 2.38 18 UMB 2.13 19 PREM 0.98 25 BARO 0.51 26 Mean 3.09 (9.91) 3.43 Std. Dev. 1.44 2.53 T-test -1.6775 Prob value 0.1117

Signed-rank test 1.415 Prob > |z| 0.1570

The laggards were FID with 2.22 percent in the 14th position, GT recording 1.99 percent coming 15th, ACCE was 16th with 1.88 percent. ZEN posited a 1.57 percent personnel to asset, UBA ranked bottom with 1.40 percent in the industry. These laggards must consider providing the needed non- monetary banking resources for their employees to create value for owners of these banks.

2.12 Fee and Commission Income

Besides interest income, banks also purse income from services and product usage fees and commissions. These are commonly retail banking customer fees such as Fees on loans and advances, ATM usage fees, Corporate Banking Credit Related Fees and other fee income such as Letters of credit issued. Referring to Table 13, there was a 9.90 percent increase in fee and commission income at the industry level. The average fee income was GHȼ 91,686,347.83 in the year 2018 also an increase from the 2017 average fee income. There exist statistical evidence that difference exists in the year 2018 and year 2017 fee and commission income as per the T-test value of 3.3623. The Wilcoxon signed-rank test is no different from the conclusion for the T-test.

The result in Table 13 shows that there were no new entrants into the top five banks, with respect to fee and commission income although positional changes occurred. GCB ranked first with 15.09 percent of the industry fee and commission income in the year 2018, STAN climbed one place to second with 13.24 percent overtaking ECO to the third position with 11.43 percent. FID also inched one place up to fourth scoring 9.10 percent followed by BAR that slipped to fifth place with 8.59 percent in the year 2018.

Table 3: Bank Fee and Commission Income BANK Fee & Comm GHȼ % Indus Rank % Diff Fee & Comm GHȼ % of Inds Rank GCB 249,025,000 15.09 1 19.85 207,787,000 13.84 1 STAN 218,550,000 13.24 2 28.03 170,698,000 11.37 3 ECO 188,582,000 11.43 3 (6.67) 202,070,000 13.45 2 FID 150,149,000 9.1 4 54.02 97,487,000 6.49 5 BAR 141,718,000 8.59 5 8.81 130,248,000 8.67 4 SCB 113,840,000 6.9 6 17.20 97,136,000 6.47 6 ZEN 92,924,327 5.63 7 26.69 73,346,499 4.88 8 ADB 75,464,000 4.57 8 3.45 72,947,000 4.86 9 SGG 71,556,947 4.34 9 (5.78) 75,948,755 5.06 7 GT 69,085,736 4.19 10 44.13 47,932,902 3.19 11 CAL 68,382,000 4.14 11 7.15 63,818,000 4.25 10 UBA 50,542,086 3.06 12 9.93 45,978,504 3.06 12 FAB 47,190,639 2.86 13 40.61 33,561,440 2.23 15 ACC 44,066,000 2.67 14 143.73 18,080,000 1.2 18 REP 32,595,000 1.98 15 34.10 24,307,000 1.62 16

BOA 21,656,990 1.31 16 (2.92) 22,308,919 1.49 17 FBN 9,353,536 0.57 17 22.16 7,656,488 0.51 20 FNB 5,673,000 0.34 18 208.48 1,839,000 0.12 23 UMB 44,740,000 2.98 13 PBL 36,802,000 2.45 14 BSCI 14,421,479 0.96 19 ENER 6,647,395 0.44 21 OMNI 4,402,000 0.29 22 HERI 716,824 0.05 24 PREM 555,579 0.04 25 BARO 392,388 0.03 26 Industry 1,650,354,261 9.89 1,501,828,172 Mean 91,686,347.83 58.73 57,762,622 T-test 3.3623 Prob value 0.0037 Signed-rank test -3.027 Prob > |z| 0.0025

The bottom of the ladder show ACCE at 14th with a 2.67 percent improvement from its performance in the year 2017. Rep was 16th with 1.98 percent, followed by BOA positing 1.31 percent. FBN recorded 0.57 percent whiles FNB was last at 0.34 percent in fee and commission income for the year 2018. We see from this that fee and commission income are complementary to bank size, deposit mobilization and loan creating ability of banks. This is a difficult area for small banks. The laggards must work extra hard to increase their performance in this respect.

2.13 PROFITABILITY

We measure banks’ ability to earn an adequate return on loans and other non-loan activities making use of total assets and invested capital for the period. Many of the issues related to profitability can be explained, in whole or in part, by a bank’s ability to effectively employ its resources. This group performance indicators include Return on Assets (ROA), Risk-Adjusted Return on Assets (RAROA), Return on Equity (ROE), Risk-Adjusted Return on Equity (RAROE).

2.13.1 ROA

ROA indicates how much net income is generated per Ghȼ of assets. On the whole, there was an increase in industry return on asset by 2.25 percent with variability of 2.44 in the year under review. Further details in Table 14 show that there was no statistical difference in ROA for the two years, a conclusion from the T-test of -1.0067. The Wilcoxon signed-rank test is no different from the conclusion for the T-test.

GT topped all the other banks in reference to ROA, it improved by five-place up in the year 2018 from the sixth place in the year 2017, with a score of 6.59 percent. BAR inched upon its performance to place second in the year 2018 with 4.33 percent although lower than the 6.91

31 percent the previous year wiles UBA declined or the first po sition the previous to third in the year 2018 with a score of 4.26 percent. STAN was fourth with a 3.64 percent ROA compared to the higher 4.1 percent in the year 2017. SCB maintained its fifth position with 3.53 percent in 2018 although this was a lower percentage than the previous year.

Table 4: Bank Return on Assets DMU 2018 Rank % Diff 2017 Rank GT 6.59 1 39.92 4.71 6 BAR 4.33 2 (37.34) 6.91 3 UBA 4.26 3 (42.43) 7.4 1 STAN 3.64 4 (11.22) 4.1 7 SCB 3.53 5 (40.47) 5.93 5 ZENI 3.34 6 (9.49) 3.69 8 ECOB 3.23 7 14.95 2.81 10 GCB 3.04 8 46.15 2.08 12 CAL 3.01 9 (12.24) 3.43 9 FIDE 2.33 10 30.17 1.79 14 BOA 1.95 11 7.73 1.81 13 SG 1.81 12 (74.83) 7.19 2 ACCE 1.41 13 11.90 1.26 18 REPU 1.31 14 (26.40) 1.78 15 FAB 1.03 15 (23.70) 1.35 17 FBN 0.95 16 (54.55) 2.09 11 ADB 0.16 17 (76.47) 0.68 21 FNB -5.36 18 (44.34) -9.63 27 BARO 6.6 4 UMB 1.6 16 BSCI 1.14 19 BEIG 0.69 20 ENER 0.22 22 PREM -0.89 23 PBL -1.23 24 OMIN -2.24 25 HERI -8.45 26 Mean 2.25 30.06 1.73 Std. Dev. 2.44 4.03 T-test -1.0067 Prob value 0.3282 Signed-rank test -1.132 Prob > |z| 0.2574

The lower end of Table 14 has REP with 1.31 percent at the 14th place, FAB reported 1.03 percent ROA, FNB made 0.95 percent, ADB with 0.16 percent, the last was FN with a negative 5.36 percent ROA which is an improvement from the year 2017 ROA of negative 9.63 percent.

2.13.2 RAROA

We attempt to capture the exposure embedded in banks’ attempts to generate return using the risk- adjusted return on asset. Here we measure how much risk is involved in producing a unit of return for a bank from using a unit of asset. The risk here is from the standard deviation of return on assets over the past three years. The mean RAROA for the industry was 3.70 with a standard deviation of 3.08 for the year 2018. There is no difference in RAROA per the T-test value of - 0.7665 for the year 2018 and the year 2017. The Wilcoxon signed-rank test is no different from the conclusion for the T-test.

In Table 15 BOA came top with 9.39 percent in four places better than its position in the year 2017. ZEN scored 8.49 percent marginally lower than the year 2017 score of 8.57 percent. ACCE recorded the highest jump in performance of 7.98 percent in the year 2018, with the third position compared to the year 2017’s RAROA score of 1.14 percent at the nineteenth position. FAB placed fourth a dip in ranking 6.38 percent in the year 2018. GT was fifth recording a 6.15 percent, four places lower of the first position in the year 2017.

Table 5: Bank Risk Adjusted Return on Assets BANK 2018 Rank % Diff 2017 Rank BOA 9.39 1 34.53 6.98 5 ZEN 8.49 2 (0.93) 8.57 4 ACC 7.93 3 595.61 1.14 19 FAB 6.38 4 (54.69) 14.08 2 GT 6.15 5 (80.43) 31.42 1 STAN 5.53 6 23.99 4.46 7 ECO 5.08 7 96.90 2.58 11 BAR 3.32 8 (48.13) 6.4 6 FID 2.98 9 144.26 1.22 17 SCB 2.89 10 2.12 2.83 10 CAL 2.79 11 38.81 2.01 13 GCB 2.27 12 83.06 1.24 16 UBA 2.2 13 (25.93) 2.97 9 FBN 1.2 14 - 1.2 18 REP 0.62 15 (17.33) 0.75 20 SG 0.61 16 (76.17) 2.56 12 ADB 0.09 17 80.00 0.05 22 FNB -1.32 18 (41.33) -2.25 26 BARO 9.61 3 BEIG 3.52 8

ENER 1.61 14 UMB 1.59 15 BSCI 0.69 21 OMIN -0.59 23 PBL -0.61 24 PREM -1.46 25 Mean 3.7 (6.33) 3.95 Std. Dev. 3.08 (54.03) 6.7 T-test -0.7665 Prob value 0.4539 Signed-rank test -0.348 Prob > |z| 0.7275

The lower performers are FBN with 1.20 percent, followed by REP at the 15th place with 0.62 percent, SG dipped in performance to 0.61 in the year 2018 from 2.56 percent. ADB made a 0.09 percent RAROA, the worst performance FNB with negative 1.32 percent was an improvement over the year 2017 figure of negative 2.25 percent.

2.13.3 ROE

ROE measures additions in the earnings to contributions of funds by owners of the bank. The higher this performance indicator the better it is for the bank. The average ROA was 15.16 percent for the year 2018 higher than the 8.5 percent of the year 2017. The variability was 10.71 lower than the 21.39 of the previous year at the industry level. The T-test value of -1.8766 means statistical difference exist in the ROE for the year 2018 and the year 2017. The Wilcoxon signed- rank test is no different from the conclusion for the T-test.

In the measure of return on equity as presented in Table 16, for the year 2018, BAR came first with 29.11 percent, followed by GT at 25.94 percent, ECO posited a 25.70 percent at third positon, GCB was forth making 24.38 percent ROE, the fifth bank was FID at 23.67 percent an improvement from the year 2017 score of 18.03 percent.

Table 16: Bank Return on Equity BANK 2018 Rank % Diff 2017 Rank BAR 29.11 1 (25.51) 39.08 2 GT 25.94 2 (1.37) 26.3 5 ECO 25.7 3 3.34 24.87 6 GCB 24.38 4 36.58 17.85 12 FID 23.67 5 31.28 18.03 11 UBA 23.67 6 (40.77) 39.96 1 ZEN 21.31 7 (7.71) 23.09 8 CAL 21.31 8 (4.61) 22.34 10 STAN 21.03 9 (10.59) 23.52 7

SCB 20.1 10 (34.74) 30.8 4 BOA 11.81 11 (8.31) 12.88 15 SG 8.83 12 (77.16) 38.66 3 ACC 7.89 13 25.04 6.31 18 REP 7.52 14 (53.92) 16.32 13 FAB 5.54 15 (44.43) 9.97 16 FBN 2.11 16 (77.09) 9.21 17 ADB 0.92 17 (81.82) 5.06 20 FNB -7.98 18 (56.39) -18.3 26 UMB 22.44 9 BARO 15.34 14 BSCI 6.1 19 BEIG 3.38 21 ENER 1.18 22 PREM -10.02 23 PBL -11.14 24 OMIN -14.31 25 HERI -26.77 27 Mean 15.16 78.35 8.5 Std. Dev. 10.71 (49.93) 21.39 T-test -1.8766 Prob value 0.0779 Signed-rank test 1.851 Prob > |z| 0.0642

The five laggards all have lower ROE in the year 2018 compared to the year 2017. REP came 14th with 7.52 percent, the next position was taken by FAB with a score of 5.54 percent, FBN came up with 2.11 percent at the sixteenth position, ADB made a 0.92 percent ROE. The last was FN with negative 7.98 percent compared to a negative 18.30 percent in 2017. These banks need to relook their asset usage, leverage levels and their profit-making strategies. 2.13.4 RAROE

The RAROE captures the exposure rooted in banks’ attempts to generate return using shareholders’ funds. Here we measure how much risk is involved in producing a unit of return for a bank from using a unit of equity. From Table 17, the mean and the spread in RAROE for the industry was 11.57 percent and 32.85 respectively in the year 2018. There is no statistical difference in RAROE for the two years under consideration from the T-test value of -0.9937. The Wilcoxon signed-rank test gives the same conclusion.

With the consideration of risk in generating a return for equity holders, GT topped all banks in the year 2018, similar to its positioning in 2017, the bank scored 141.97 percent, STAN came second

35 with 16.40. ZEN was third with 13.74 percent. ECO posited 4.98 percent at fourth place, the fifth bank was BAR making 4.90 percent.

Table 6: Bank Risk Adjusted Return on Equity BANK 2018 Rank % Diff 2017 Rank GT 141.97 1 (31.90) 208.46 1 STAN 16.4 2 (11.49) 18.53 3 ZEN 13.74 3 63.77 8.39 5 ECO 4.98 4 28.35 3.88 7 BAR 4.9 5 (27.84) 6.79 6 GCB 4.67 6 67.38 2.79 11 ACC 4.54 7 505.33 0.75 19 SCB 3.47 8 18.43 2.93 10 CAL 3.1 9 51.22 2.05 12 FID 2.74 10 77.92 1.54 16 BOA 2.49 11 43.10 1.74 14 FAB 2.48 12 (75.59) 10.16 4 UBA 2.22 13 (40.64) 3.74 8 SG 0.58 14 (81.53) 3.14 9 FBN 0.54 15 (60.00) 1.35 18 REP 0.33 16 (52.17) 0.69 20 ADB 0.08 17 (81.82) 0.44 21 FNB -1.03 18 (51.42) -2.12 25 BARO 27.62 2 ENER 1.76 13 UMB 1.68 15 BEIG 1.46 17 BSCI 0.75 19 PBL -0.58 22 OMNI -0.66 23 PREM -1.47 24 Mean 11.57 (1.62) 11.76 Std. Dev. 32.85 40.63 T-test -0.9937 Prob value 0.3343 Signed-rank test 0.283 Prob > |z| 0.7771

The banks that recorded low scores included SG with 0.58 percent. FBN scored 0.54 in the 15th place. REP made 0.33, ADB came next with 0.08 at the 17th place. FNB made a negative 1.03 percent in the year 2018 an improvement from the negative 2.12 percent score in 2017.

2.14. Net Interest Margin

Net Interest Margin (NIM) measures the net interest income relative to the Banks' total assets. This indicator reflects the difference between interest earned on assets minus interest cost per Ghc of assets. The NIM measure the banks spread per Ghc of assets. High NIM suggests that the difference between deposit rates and loans in addition to other interest earnings assets are high or low. The NIM for the industry was 7.07 percent on the average with variability of 1.62.

The NIM results is presented in Table 17, UBA recorded the highest NIM of 9.64 percent, the second bank is GCB with 9.09 percent, SCB came third making 8.35 percent, with ECO placing fourth recording 8.23 percent. SG ends the top five banks with a NIM of 8.35 percent per each Ghana cedi of assets deployed in the year 2018.

Table 7: Bank NIM Bank 2018 Rank UBA 9.64 1 GCB 9.09 2 SCB 8.35 3 ECO 8.23 4 SGG 8.10 5 CAL 7.70 6 ZEN 7.60 7 BOA 7.57 8 STAN 7.51 9 ADB 7.38 10 BAR 7.23 11 FID 7.13 12 GT 7.05 13 ACC 6.19 14 REP 6.18 15 FAB 4.59 16 FBN 4.33 17 FNB 3.39 18 Mean 7.07 Std Dev 1.62

The bottom five banks are ACCE with 6.19 percent at the 14th position, REP reported 6.18 percent, FAB 4.59 percent, followed by FBN scoring 4.33 percent and the last bank was FNB with 3.39 percent. These low performing banks will need to adopt strategies that will increase their return per a Ghȼ of assets.

2.15 Asset Efficiency

This measure is an attempt to capture a bank’s ability to generate revenue from its earnings asset. Earnings asset is all assets excluding intangible asset, goodwill, tax claims, patents, trademarks and other non-interest bearing claims. This indicator is higher if the bank engages in activities for which there is little price competition or that are riskier. This performance indicator is also higher if the bank generates a greater proportion of revenues from activities that do not contribute to earnings assets such as transaction services and asset management. There was an improvement in the year 2018 asset efficiency at the industry level to 92.77 percent with a lower standard deviation of 2.98 compared to the year 2017. Furthermore, Table 18 reveals that there is no statistical evidence to show that differences exist in the asset efficiency for the year 2018 and the year 2017 per the t-test value of 1.4953. The Wilcoxon signed-rank test gives the same conclusion.

BAR made the most out of its asset by way of efficiency with 97.35 percent in generating revenue, it was followed by FBN at 97.16 percent. UBA came third with a marginal decrease in asset efficiency in the year 2018 with a 96.81 percent. FID dipped in its score of 94.97 percent in the year 2018 although there was an improvement in the bank’s rank of fourth place. GT ranked fifth positing a score of 94.80 percent.

Table 8: Bank Asset Efficiency Bank 2018 Rank % Diff 2017 Rank BAR 97.35 1 0.86 96.52 3 FBN 97.16 2 1.36 95.86 5 UBA 96.81 3 (0.91) 97.7 2 FID 94.97 4 (0.15) 95.11 7 GT 94.8 5 (1.47) 96.21 4 FNB 94.09 6 8.93 86.38 24 REP 93.7 7 (0.35) 94.03 8 ADB 93.58 8 1.07 92.59 9 SCB 93.19 9 1.66 91.67 12 ECO 92.91 10 3.71 89.59 17 ZEN 91.94 11 (0.09) 92.02 11 BOA 91.62 12 3.27 88.72 22 GCB 91.41 13 5.68 86.5 23 STAN 90.43 14 1.49 89.1 19 ACC 90.22 15 (0.17) 90.37 14 CAL 90.03 16 (1.42) 91.33 13 SGG 89.83 17 1.15 88.81 21 FAB 85.72 18 (5.08) 90.31 15 BARO 99.49 1 PREM 95.29 6 UMB 92.58 10

PBL 89.63 16 BSCI 89.51 18 OMIN 89.01 20 BEIG 85.15 25 ENER 78.49 26 HERI 75.77 27 Mean 92.77 2.33 90.66 Std. Dev. 2.98 5.32 T-test 1.4953 Prob value 0.1532 Signed-rank test -1.394 Prob > |z| 0.1634

The bottom five banks are STAN with 90.43 percent, ACCE came next with 90.22 percent at the 15th place. CAL made a 90.33 percent a dip in this indicator, SG improved marginally its performance to 89.83 percent in the year 2018 with FAB’s 85.72 percent firmly rooting at the bottom by way of asset efficiency.

2.16 Asset Productivity

We estimate the asset efficiency of banks as earnings assets over total assets; this indicates a bank’s ability to make efficient use of assets. For banks that have high levels of non-earning assets, asset efficiency will fall and negatively impact on that bank’s risk-adjusted return on capital. The industry mean was 14.72 and a dispersion of 2.49 for the year under review. In Table 19, statistical evidence exists that there is a difference in the asset productivity for the year 2018 and the year 2017 per the T-test value of -3.3939. The Wilcoxon signed-rank test gives the same conclusion.

GT made an impressive performance for its 14th position in the year 2017 to the first position in the year 2018 with a score of 18.87 percent. BOA maintained its second place in both years with a rather lower 17.19 percent in the year 2018.UBA came third at 16.97 percent in three places better than the year 2017. ADB recorded 16.93 percent at fourth place in the year 2018 but with a lower score compared to 2017. The fifth-placed bank was ZEN at 16.78 percent for the year under review.

Table 9: Bank Asset Productivity Bank 2018 Rank % Diff 2017 Rank GT 18.87 1 3.97 18.15 14 BOA 17.19 2 (43.25) 30.29 2 UBA 16.97 3 (26.85) 23.2 6 ADB 16.93 4 (11.31) 19.09 8 ZEN 16.78 5 8.96 15.4 19 CAL 16.35 6 (14.22) 19.06 9

GCB 15.99 7 (8.37) 17.45 17 ACC 14.8 8 (0.94) 14.94 22 STAN 14.6 9 (9.03) 16.05 18 ECO 14.54 10 4.60 13.9 24 SGG 14.46 11 (22.55) 18.67 12 SCB 14.44 12 (46.32) 26.9 3 FAB 14.34 13 (5.91) 15.24 20 FID 14.18 14 (6.40) 15.15 21 BAR 12.84 15 (7.76) 13.92 23 REP 12.77 16 (28.62) 17.89 15 FNB 9.83 17 (26.31) 13.34 25 FBN 9.11 18 (48.03) 17.53 16 BEIG 49.68 1 OMIN 24.85 4 PREM 23.22 5 ENER 21.09 7 BSCI 19.03 10 PBL 18.68 11 UMB 18.62 13 BARO 12.27 26 HERI 11.46 27 Mean 14.72 (24.32) 19.45 Std. Dev. 2.49 (66.76) 7.49 T-test -3.3939 Prob value 0.0035 Singed-rank test 3.201 Prob > |z| 0.0014

The poor performers included FID with 14.18 percent in asset productivity. BAR assumed the 15th position with 12.84 percent. REP recorded 12.77 percent, FNB made a 9.83 percent in asset productivity, the worst bank was FBN with 9.11 percent in the year 2018.

CHAPTER 3: BANKING EFFICIENCY 3.1 Introduction

In defining the inputs and outputs in financial institutions, the approaches used in literature include the intermediation approach, the production approach, the user cost approach and the value-added approach. Of these, two prominent approaches emerge; the production approach and the intermediation approach.

The production approach theorized by Berger and Humphrey (1997) presents the financial institution as a producer of deposit accounts and loans; the output is the number of accounts or their associated type of transactions including deposit and loan accounts, and inputs are calculated as the number of employees (labour) and capital expenditures on noncurrent assets and other material.

Earlier work by Sealey and Lindley (1977) posited the intermediation approach wherein financial institutions were viewed as intermediaries, converting and using factors of production paid for by owners to transfer financial savings from surplus units to deficit units in the form of loans. We prefer the intermediation approach in this report as, per the Banks and Specialised Deposit-Taking Act 930 Institutions Act, 2016, Ghanaian banks intermediate between surplus units (deposit) and deficit units (borrowers) on the loanable funds market.

Using the intermediation model, our analysis suggests that banks use three inputs; labor, noncurrent assets and deposits and three outputs; loans, investment income and fee and commission income. The three price inputs are the price of labour, price of noncurrent assets and price of deposits. The prices of outputs are the price of loans, price of investment and price of fee and commission income. We also use the non-parametric technique in estimating our efficiency. We used the input orientation model for our technical and cost efficiency estimates in a variable return to scale (VRS) setting because banks vary in size and also branch locations. In reference to revenue and profit efficiency, we adopted the output orientation model with a VRS setting.

3.2 Technical efficiency

Technical Efficiency, also known as production efficiency, is an assessment of management ability to use the least amount of inputs to produce maximum outputs. In this report, we measure banks’ ability to transform their inputs into outputs. A technically efficient bank uses the least amount of inputs to produce maximum outputs. In the intermediation model, bank management uses three inputs, namely labor, noncurrent assets and deposit turnout outputs in the form of loans, investment income and fee and commission income. We used the input orientation model for our technical and cost efficiency estimates in a VRS setting because banks vary in size and also branch location.

A high technical efficiency score for a bank is an indication of good technical knowhow and the adoption of efficient production systems by the bank’s management thereby avoiding waste. On the other hand, a low technical efficiency indicates the need for management to improve upon their production process. In Table 21 the industry-level technical efficiency increased by 51.52 percent to 96.01 points in the year 2018. There was a lower variability of 7.93 for the same year. There is

41 statistical evidence that technical efficiency for the two years was not the same, this conclusion is based on the T-test value of 2.7934. The Wilcoxon signed-rank test gives the same conclusion.

We see from Table 20 that thirteen banks were technically efficient during the year 2018, scoring the maximum 100 points each. These banks are BAR, BOA. CAL, ECO FBN FID, FN, GCB, GT, SG, STAN, UBA, ZEN. We particularly notice that GT and ZEN experienced a massive improvement in its managerial deployments of inputs to create outputs by 99.58 points and 53.58 points respectively.

Table 10: Bank Technical Efficiency Bank 2018 Rank % Diff 2017 Rank BAR 100 1 - 100 1 BOA 100 1 - 100 1 CAL 100 1 - 100 1 ECO 100 1 - 100 1 FBN 100 1 - 100 1 FID 100 1 - 100 1 FN 100 1 - 100 1 GCB 100 1 - 100 1 GT 100 1 23,709.52 0.42 26 SG 100 1 - 100 1 STAN 100 1 - 100 1 UBA 100 1 - 100 1 ZEN 100 1 115.42 46.42 20 REP 98.69 14 3,995.02 2.41 25 FAB 87.61 15 361.59 18.98 23 ADB 84.69 16 55.57 54.44 19 ACC 83.58 17 236.74 24.82 22 SCB 73.6 18 23.84 59.43 17 PBL 100 1 HERI 100 1 OMIN 58.61 18 BSCI 33.3 21 ENER 11.95 24 UMB 100 1 Mean 96.01 31.52 73 Std. Dev. 7.93 37 T-test 2.7934 Prob value 0.0125 Signed-rank test -2.623 Prob > |z| 0.0087

REP greatly improve its technical efficiency to 98.69 points, FAB 87.61, ADB 84.69, ACC 83.58 and SCB 73.60 points for the 14th to the 18th ranking accordingly. These banks must reconsider the combination of some of their inputs increasing outputs if they are to improve their efficiency levels.

3.3 Revenue Efficiency

Revenue efficiency emanates from the price at which banks sell their output on the market. For revenue efficiency, the same three inputs and three outputs are considered in addition to the price of a loan, price of investment and the price of fee and commission income. Banks that differentiate their products can assume price leadership status and report higher revenue efficiency scores than other banks. Per the results in Table 21, the industry saw an increase in revenue efficiency by 6.77 percent, this matched a 13.67 variability in the year 2018. Finally, the T-test value of 2.485 points to the fact that there is a statistical difference in revenue efficiency for the year 2018 and the year 2017. The Wilcoxon signed-rank test gi ves the same conclusion.

Seven banks namely BAR, CAL, FBN, FN, GCB, UBA and ZEN where revenue efficient as they scored the maximum 100 points. For banks like CAL, FB, ZEN and FID, they notched their revenue efficiency to be on the efficient frontier from the 95.13, 82.93, 86.64, points respectively reported for the year 2017.

Table 11: Bank Revenue Efficiency Bank 2018 Rank % Diff 2017 Rank BAR 100 1 - 100 1 CAL 100 1 5.12 95.13 8 FBN 100 1 20.58 82.93 15 FN 100 1 - 100 1 GCB 100 1 - 100 1 UBA 100 1 - 100 1 ZEN 100 1 15.42 86.64 12 FID 96.83 8 3.88 93.21 10 ADB 92.73 9 17.32 79.04 17 GT 86.4 10 37.03 63.05 22 BOA 86.22 11 125.71 38.2 26 ECO 83.37 12 (1.57) 84.7 13 REP 75.92 13 9.19 69.53 19 SCB 75.24 14 (9.49) 83.13 14 ACC 74.51 15 10.66 67.33 20 SG 70.81 16 13.33 62.48 23 FAB 62.97 17 13.73 55.37 25 STAN 62.56 18 (10.96) 70.26 18 PREM 100 1 BARO 100 1

BSCI 100 1 OMNI 93.56 9 UMB 91.68 11 PRUD 81.55 16 ENER 64.43 21 HERI 58.39 24 Mean 87.08 6.77 81.56 Std. Dev. 13.68 17 T-test 2.485 Prob value 0.0237 Signed-rank test -2.294 Prob > |z| 0.0218

The lower end of this table shows that SCB experienced a decline in revenue efficiency of 75.24 in the year 2018 at position 14th. ACC recorded an improvement in revenue efficiency of 74.51 in the year under review, likewise SG with a score of 70.81 better than what was posted in the year 2017. FAB posited 62.97 points in the year 2018 better than the 55.37 points in the year 2017. STAN recorded a decline in technical efficiency posting 62.56 points in 2018 compared to the 70.26 points in 2017. An assessment of these banks revenue model will go a long way to influence their revenue in the coming years

3.4 Cost Efficiency

Cost efficiency captures the price at which banks acquire their inputs from the market, as banks compete for the same set of inputs. For cost efficiency, the same three inputs and three outputs are considered in addition to the price of labour, price of non-current assets and price of deposit. Banks that acquire these inputs at cheaper prices are preferred and are most likely to report higher cost efficiency scores than others. The cost efficiency scores are presented in Table 22. The increase in cost efficiency was 29.25 percent, the dispersion was also 24.27 better than 28 dispersion for the year 2017. There is statistical evidence that cost efficiency for the year 2018 is different from the year 2017, the T-test value of 2.485 supports this assertion. The Wilcoxon signed-rank test gives the same conclusion.

The year 2018 had eight banks, namely BAR, ECO, FBN, FN, GCB, SCB, STAN and UBA, scoring the maximum 100 points compared to four banks in 2017. Of these STAN improved by 2 points, SCB by 14.6 points, FBN made 30.8 points, FNB made 36 points, improvements respectively.

Table 12: Bank Cost Efficiency Bank 2018 Rank % Diff 2017 Rank BAR 100 1 - 100 1 ECO 100 1 - 100 1

GCB 100 1 - 100 1 STAN 100 1 2.04 98 6 SCB 100 1 17.10 85.4 8 FBN 100 1 44.51 69.2 12 FNB 100 1 56.25 64 13 UBA 100 1 62.60 61.5 14 SG 96.17 9 29.61 74.2 11 BOA 92.2 10 (7.80) 100 1 FID 90.01 11 20.01 75 10 ZEN 87.33 12 150.95 34.8 20 REP 64.7 13 92.56 33.6 22 GT 62.84 14 (16.99) 75.7 9 CAL 54.07 15 9.90 49.2 16 FAB 49.72 16 190.76 17.1 26 ACC 35.41 17 (16.88) 42.6 18 ADB 33.26 18 (22.65) 43 17 BARO 100 1 HERI 87.4 7 PREM 52.7 15 OMNI 38.5 19 PRUD 34.7 21 UMB 33 23 BSCI 32.1 24 ENER 25.9 25 Mean 81.43 29.25 63 Std. Dev. 24.28 28 T-test 2.9054 Prob value 0.0098 Singed-rank test -2.303 Prob > |z| 0.0213

Banks that recorded low performance are GT, 62.84 points, CAL 54.07 points, FAB 49.72 points, ACC 35.41 points and ADB with 33.26 points in cost efficiency. The cost of acquiring inputs is an area that these low performing banks will have to consider, these banks are paying high prices for their inputs, a reduction in input price at the current output or an increase in output at the current input price will improve their cost efficiency.

3.5 Profit Efficiency

Profit efficiency considers banks’ revenue efficiency and cost efficiency for the same three inputs and three outputs at their respective prices. The industry experienced a 28 percent increase in profit

45 efficiency with an improved standard deviation of 29.91 for the year 2019. There is no statistical difference between the year 2018 and the year 2017 based on a T-test value of 1.0063. The Wilcoxon signed-rank test gives the same conclusion.

From Table 23 Fifteen banks scored 100 points each for profit efficiency in the year 2018, of which ACCE, BAR, SCB, SG, STAN, UBA, ZEN, CAL, ECOB, FID, GCB reported similar performance in 2017. BOA, FBN, FN and GT improved from 31.25, 23.89, 10.95 and 49.92 to 100 points respectively in 2018.

Table 13: Bank Profit Efficiency Bank 2018 Rank % Diff 2017 Rank ACC 100 1 - 100 1 BAR 100 1 - 100 1 SCB 100 1 - 100 1 SG 100 1 - 100 1 STAN 100 1 - 100 1 UBA 100 1 - 100 1 ZEN 100 1 - 100 1 CAL 100 1 - 100 1 ECO 100 1 - 100 1 FID 100 1 - 100 1 GCB 100 1 - 100 1 BOA 100 1 220.00 31.25 20 FBN 100 1 318.59 23.89 22 FNB 100 1 813.24 10.95 23 GT 100 1 100.32 49.92 16 REP 29.65 16 (26.41) 40.29 18 ADB 22.04 17 (45.41) 40.37 17 FAB 15.13 18 (84.87) 100 1 PREM 100 1 BARO 100 1 BSCI 100 1 UMB 33.8 19 PRUD 28.24 21 OMNI 9.36 24 ENER 4.37 25 HERI -2.64 26 Mean 87.04 28.00 68 Std. Dev. 29.91 39 T-test 1.0063 Prob value 0.3284 Singed-rank test -0.525

Prob > |z| 0.5999

The worst performance in profit efficiency was REP with 29.65 points, ADB 22.04 points and FAB with a score of 15.13 points in 2018. A serious look into inputs, outputs and their respective price will help the low performing banks.

3.6 Overall Performance

The industry experienced a 20.54 percent increase in overall efficiency from Table 24, heavily driven by technical efficiency an indication of improvement in managerial know-how and technology in the deployment of bank resources in creating outputs. It can also be a positive brush off of the Bank of Ghana’s strict enforcement of the banking law in the recent two years. There is statistical evidence that the overall performance for the year 2018 and the year 2017 is different per the T-test value of 3.8038. The Wilcoxon signed-rank test gives the same conclusion.

For the year 2018 five banks scored the maximum 400 points for all efficiency indicator namely technical, revenue, cost and profit. These banks’ are BAR, GCB, FBN, FN and UBA. It must be noted that BAR, and GCB were the top performers in 2017 as well.

Table 14: Bank Overall Efficiency Bank 2018 Rank % Diff 2017 Rank BAR 400 1 - 400 1 GCB 400 1 - 400 1 FBN 400 1 42.12 281.45 12 FN 400 1 45.51 274.9 14 UBA 400 1 10.64 361.54 7 ZEN 387.33 6 37.75 281.18 13 FID 386.84 7 3.17 374.95 5 ECO 383.37 8 (0.35) 384.7 4 BOA 378.42 9 38.39 273.44 16 SG 366.98 10 6.67 344.02 10 STAN 362.56 11 (2.45) 371.66 6 CAL 354.07 12 1.40 349.19 9 GT 349.24 13 58.76 219.98 22 SCB 348.84 14 5.07 332.01 11 ACC 293.5 15 17.28 250.25 19 REP 268.96 16 67.08 160.98 25 ADB 232.72 17 0.00 232.71 21 FAB 215.43 18 10.03 195.8 24 BARO 400 1 PREM 352.7 8 UMB 274.66 15

BSCI 265.41 17 PBL 251.24 18 HERI 243.12 20 OMIN 200.21 23 ENER 107.2 26 Mean 351.57 20.54 291.67 Std. Dev. 59.02 79.57 T-test 3.8038 Prob value 0.0014 Singed-rank test -3.227 Prob > |z| 0.0013

The worst performers by way of overall efficiency include SCB with 348.84 points, ACCE 293.50 points, REP 268.96 points, ADB 232.72 and FAB 215.43 points. These banks may be successful in other areas of revenue other than, loan interest income, non-loan interest income and fee and commission income, however applying the intermediation model of banks will suggest that the low performing banks may have some work to do if they are to truly uphold the intermediation identity of banks.

3.7 Regional Presence Profitability

Under this category, we consider regional and bank branch retail presence, an important factor in assessing overall bank profitability. Although banks can decide to remain small by having a few retail outlets as part of their strategy, we hold the view that there is a social contract expectation on banks to have a presence not only in Accra and better off regions but a presence in at least all regional capitals. We also acknowledge that although some banks may perceive some locations as the domain for NBFIs, a regional capital presence would contribute significantly to overall efforts to increase financial inclusion and formalization of the Ghanaian economy, and for that matter a minimum expectation for banking institutions.

In our analysis, a score of 10 was added to each regional capital presence of a bank. With this consideration, BAR and GCB are adjudged to be the overall best performing bank for the years 2018 and also 2017 with a score of 500 points in both years. Table 25 provides the details of the regional presence performance. ZEN came third in the year 2018 with 467.33 points from a 12th place in the year 2017. SG made the fourth position two places better than the previous year with 466.98 points. The fifth bank with 463.37 points was ECO a dip of one place the year before.

Table 15: Regional Presence Performance Bank 2018 Rank 2017 Rank BAR 500 1 500 1 GCB 500 1 500 1 ZEN 467.33 3 361.18 12

SG 466.98 4 444.02 6 ECO 463.37 5 464.7 4 FBN 460 6 331.45 16 FID 456.84 7 464.95 3 STAN 452.56 8 461.66 5 UBA 450 9 411.54 9 BOA 438.42 10 313.44 18 GT 419.24 11 289.98 20 FN 410 12 284.9 21 CAL 394.07 13 389.19 10 ACC 393.5 14 350.25 13 SCB 388.84 15 372.01 11 REP 348.96 16 240.98 25 ADB 332.72 17 332.71 15 FAB 265.43 18 245.8 24 PREM 442.7 7 BARO 420 8 UMB 344.66 14 BSCI 325.41 17 PBL 311.24 19 HERI 263.12 22 OMIN 260.21 23 ENER 147.2 26

The bottom-ranked banks include ACC with 393.5 points at the 14th place, SCB reported 388.84 points, REP made 348.96 points, ADB with 332.72 points at the 17th place and the bank at the bottom of this indicator was FAB with 265.43 points.

CHAPTER 4: INTER BANK EFFICIENCY ANALYSIS

4.1 Introduction This section of the report is on the details of the efficiency scores for each bank. The analysis considers areas that the banks have good performance and also provides some suggestions for areas that the banks can improve its performance. This recommendation is strictly based on the intermediation model of banks assumed for this report. 4.2 Access Bank

120.00

100.00 100.00

83.58 80.00 74.51

60.00

Efficiency Efficiency Scores 40.00 42.58 35.41

24.82 67.33 20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 9. Access Bank efficiency estimates

The efficiency scores for ACC as presented in Figure 9 show that the bank remarkably improved its technical efficiency in the year 2018, this was a whopping improvement of 236.74 percent from the year 2017 score in managerial know-how in deploying resources contributed by shareholders. This improved technical efficiency also translated into revenue efficiency for ACC by 7.18 %, this is attributable to the gains recorded from fee income and interest on loans. ACC, however, struggled to maintain good control over cost, the bank recorded a decline in cost efficiency of 7.17 %, this is fairly attributed to a marginal increase in all input cost in generating the revenue for the bank. ACC bank posted a score of 100 in profit efficiency for the 2 years running.

On the industry level, ACC will have to greatly improve its cost efficiency by deploying new strategies to cut down on cost incurred in acquiring inputs for creating value for its shareholders. The bank must additionally reconsider its products and service mix available to the public, a look

50 at pricing of products and services will help Access bank improve its revenue efficiency. This will also demand improved managerial know-how and efforts compared to what the leaders of the banking industry are doing. Efforts should be targeted at increasing fee and commission income, the bank’s loan income should be given a positive boost, whiles the proportion of non-loan interest income is maintained if not improved.

4.3 ADB

100.00 92.73 90.00 84.69

80.00

70.00 79.04

60.00 54.44

50.00 42.99 40.37 40.00 Efficiency Efficiency Score 30.00 33.26 20.00 22.04 10.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 10: ADB efficiency estimates

In Figure 10, ADB greatly improved its technical know-how in making use of its resources as it gained 55.57 percent improvement in technical efficiency in 2018. This was also reflected in an improvement in revenue efficiency leading to a 17.32 percentage increase, however, the bank suffered a decline in cost-efficiency by 22.77 percent. The worse of this decline was in profit efficiency where the bank made a 45 percent decrease.

At the industry level, ADB still lags the leaders of the industry in all areas of efficiency namely technical, revenue, cost and profit. The major area of concern for the management of ADB should be how to control the price of non-current assets in the future and the cost of mobilizing its deposit. New strategies should be adopted to improve employee output at the current employee compensation. The loan pricing strategy of ADB is good, efforts should go into how to increase non-loan interest income, the choice of investment mix must be assessed and portfolio rebalancing undertaken to soar up the income from this income basket. The fee and commission income basket must be evaluated so that the bank can harness the potential in this income stream for the providers of funds of ADB.

4.4 Barclays Bank

120.00

100.00

80.00

60.00

40.00 Efficiency Efficiency scores

20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 11. Barclays Bank efficiency scores

The line graph for BAR is a straight line on the 100 points efficiency score this clearly shows that BAR made the maximum points in all efficiency indicators for the year 2018 just as it was in the year 2017. The bank was the industry leader in all the efficiency indicators.

BAR must relook the cost of its deposit, and the usage of its non-current assets as a loose on control of these areas must not auger well for the bank in the future. Income from fee and commission and non-loan interest will have to increase or such funds divested into loans which for now looks more profitable for bank, this in the future will help the bank to improve its performance.

4.5 Bank of Africa

120.00 100.00 100.00 100.00 100.00 86.22 80.00 92.20

60.00

40.00 38.20

Efficiency Efficiency Score 31.25 20.00

- Tech eff Rev eff Cost eff Prof eff Axis Title

2018 2017

Figure 12: BoA efficiency estimates

BOA has pursued efficient managerial know-how in deploying its resources giving the bank the maximum performance in technical efficiency, the bank further improved its revenue efficiency by 167.76 percent in 2018, but a decline of 8.45 percent in cost efficiency, however, there was a maximum profit efficiency score of 100 in the year 2018. Overall BOA’s efficiency performance was steady in the year 2018 than the scores for the year 2017.

There is the need for BOA to consider minimizing the cost of mobilization deposit and cost of non-current asset, the current strategy for fee and commission income and non-loan interest income should be maintained if not improved as any reduction in this income source will have a huge negative impact for the back if the year 2018 income strategy is anything to go by.

4.6 CAL Bank

120.00

100.00 100.00 100.00 100.00

100.00 100.00 95.13 80.00

54.07 60.00

Efficiency Efficiency scores 40.00 49.19

20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 13:CAL Bank efficiency estimates

CAL is among the industry leaders in the area of technical, revenue and profit efficiency in the year 2018. Furthermore, there was an improvement in revenue efficiency by 5.12 percent and also gained 11.20 percent in cost efficiency in the year 2018.

CAL must reduce its cost of deposit by diversifying its pool of deposits, possibly the pursuit of retail deposits will help. The bank must further look into its loan portfolio and reduce trouble loan areas that bring in least loan income, an expansion of fee and commission income and increased investment in non-loan interest income activities will greatly improve the current performance of CAL.

4.7 Ecobank

Ecobank 105.00 100.00 100.00 100.00 100.00

95.00

90.00 84.70

85.00 Efficiency Efficiency Scores

83.37 80.00

75.00 Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 14: Ecobank efficiency estimates

ECO is among the industry leaders with respect to technical, cost and profit efficiency for the years 2018 and 2017. The major area for improvement has been in revenue efficiency where there was a marginal decline of 1.60 percent. The current strategy in resource deployment, cost management and profit generation should be maintained. There is the need for the management of Ecobank to review its strategy to increase improve its revenue efficiency. The bank must take a second look at its suppliers of loanable funds and purse retail deposit maintaining the current weight of wholesale suppliers of funds if possible. The use of non-current assets in the bank needs to be supervised to avoid its wastage. Ecobank will have to relook its fees and commission business model, by increasing investment in non-loan interest income source if loan management is becoming a challenge. A revision of loan products to reduce troubled loans is strongly recommended as this will heavily boost the overall income of the bank.

4.8 FAB

120.00

100.00 100.00 87.61

80.00 62.97 60.00 49.72 55.37

Efficiency Efficiency Scores 40.00

18.98 17.14 20.00 15.13

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 15: FAB efficiency estimates

FAB lagged the industry leaders in all four efficiency indicators although there was an improvement in three areas in the year 2018. The bank improved its managerial knowhow by 361.59 percent, gained 13.73 percent in revenue efficiency, a further increase of 190.08 percent in cost efficiency, the sharp decline in profit efficiency of 84.87 percent in the year 2018.

FAB revise its loan business model and loan portfolio to improve its loan interest income as a matter of urgency. Furthermore, the bank needs to adopt strategies that will increase the patronage of its products and services that leads to fee and commission income, the current income proportion of income from non – loan interest income must be maintained if not increased.

4.9 FBN

120.00 100.00 100.00 100.00 100.00 100.00

80.00 82.93

60.00 69.17

Efficiency Efficiency Scores 40.00 23.89 20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 16:FBN efficiency estimates

FBN is among the industry leaders in all four efficiency indicators in this report. The year 2018 was a good year for this bank as its performance soared to the position of industry leaders from the year 2017 revenue, cost and profit efficiency.

To improve on this performance, FBN should rechannel more funds into loans from non-loan interest income activities, as the year 2018 was not a good year in this respect. The bank must furthermore change its reconsider its business model in the fee and commission income activities a strategy that will introduce new products or services or patronage of existing products in this regard is vital In regard to non-loan interest income the bank must negotiate for increase returns or rebalance its portfolio to increase its returns in these income-generating source.

4.10 Fidelity Bank

120.00

100.00 100.00 96.83 100.00 90.01

80.00 93.21

74.95 60.00

Efficiency Efficiency Scores 40.00

20.00

- Tech eff Rev eff Cost eff Prof eff Axis Title

2018 2017

Figure 17: Fidelity Bank efficiency estimates

FID is among the industry leaders in two areas, technical efficiency and profit efficiency. The bank greatly improved its cost efficiency in the year 2018 by 20.09 percent and gained revenue efficiency marginal by 3.88 percent in the year 2018.

FID must reconsider its supply of loanable funds and if possible pursue retail depositors, to reduce its cost of deposit, over reliance on wholesale suppliers of funds will hurt the bank's bottom line. FID must review its loan interest income and non-loan interest income strategy to increase these incomes. The fee and commission income strategy needs to improve.

4.11 FNB

120.00

100.00 100.00 100.00 100.00 100.00

80.00 63.95

60.00

Efficiency Efficiency Scores 40.00

20.00 10.95

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 18: First National Bank efficiency estimates

FNB scored 100 points for all efficiency indicators namely technical, revenue, cost and profit, placing it among the leaders, the bank with respect to these indicators at the industry level. The management of FNB has improved its performance in the year 2018 compared to the year 2017.

FNB must work reducing the wastage in the use of non-current assets, create more loans which will translate into more loan interest income all things being equal, increase the patronage of products and services that generate fees and commission income. A redirection of funds from non- loan interest income activities into loans supported with an improved credit management strategy will greatly benefit the shareholders of FNB.

4.12 GCB

120.00

100.00 100.00 100.00 100.00 100.00

80.00

60.00

Efficiency Efficiency Score 40.00

20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 19: GCB efficiency estimates

GCB is among the industry leader in all the four areas of efficiency indicators for years 2018 and 2017. This performance has been supported by a large bank and deposit size.

To maintain its strong performance GCB must work on reducing its deposit mobilization cost and the cost of non-current assets. GCB must work on its loan income generation by creating more loans backed by effective credit management system, maintain the proportion of investment in non-loan interest income. Additionally, the bank must maintain or improve its fee and commission income

4.13 GT Bank

120.00

100.00 100.00 100.00 86.40 75.72 80.00

60.00 62.84 49.92 63.05

Efficiency Efficiency Score 40.00

20.00 0.42 - Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 20: GT Bank efficiency estimates

GT recorded a massive improvement in technical efficiency that is its ability to turn inputs into outputs for the year under review. For revenue efficiency, the bank made 37.03 percent, but declined in cost efficiency by 20.50 percent and experienced an increase in profit efficiency by 100.32 percent in the year 2018.

GT must greatly improve its loan interest income, by creating more loans through the pursuit of a fair balance between loan income and non-loan interest income activities. The pursuit of strategies that will increase fee and commission income is greatly recommended.

4.14 Republic Bank

120.00 98.69 100.00

75.92 80.00 64.70

60.00 69.53 40.29 40.00 33.57 Efficiency Efficiency Score

20.00 29.65 2.40 - Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 21: Republic Bank efficiency estimates

REP continues to struggle in all four areas of efficiency indicators although on the whole year 2018 was an improvement for the bank but for profit efficiency. The bank saw a massive improvement in technical efficiency by over 4012.08 percent. In revenue efficiency there was a 9.19 percent improvement, in cost efficiency there was a 92.73 percent this could translate into profit efficiency as the bank decline in this respect by 35.89 percent.

The bank must consider increasing the output from non-current assets, more so there must be massive the deployment of strategies that will rake in more fee and commission income, interest from loans and importantly income from non-loan interest activities. Efforts should be geared toward increasing the patronage of the bank’s products and services that generates fee and commission income. REP must push for products that bring in high non-loan interest income but must be mindful of the risk involved. The current loan product array must be assessed so that problematic products reduced.

4.15 SCB

120.00

100.00 100.00 100.00 83.13 80.00 73.60 85.39 75.24 60.00 59.46

Efficiency Efficiency Score 40.00

20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 22: Standard Chartered Bank efficiency estimates

SCB, on the whole, witnessed improvements in its efficiency scores, specifically in technical and cost efficiency by 23.78 percent and by 17.11 percent respectively. There was however a decline in revenue efficiency by 10.49 percent.

The management of the bank must consider strategies that will increase its loan income and particularly non-loan interest income. This should not be at the expense of fee and commission income. SCB's identity in the area of intermediation lags the industry leaders, however, SCB has been greatly successful in the pursuit of a differentiation banking strategy evidence in good fundamentals.

4.16 SG Bank

120.00

100.00 100.00 96.17 100.00

80.00 70.81 74.16 60.00 62.48 Efficiency Efficiency Score 40.00

20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 23:SG Bank efficiency estimates

SG has been among the industry leaders with respect to technical and profit efficiency for the two years running, the bank further improved its revenue efficiency by 13.33 percent and cost efficiency by 29.68 percent in the year 2018.

For improvement, SG must aim at diversifying its deposit source push towards retail depositors to reduce to cost of deposit. From the income end, SG should consider increasing its loan income mindful of problem loans and negotiate higher rates on its non-loan interest income. Increasing the usage of products and services that bring fee and commission income will do the bank a lot of good.

4.17 Stanbic Bank

120.00

100.00 100.00 100.00 100.00

98.02 80.00 70.26

60.00 62.56

Efficiency Efficiency Score 40.00

20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 24: Stanbic Bank efficiency estimates

STAN belongs to the leaders of the industry in technical, cost and profit efficiency. The only area of bad performance is in the area of revenue efficiency, where there was a decline of 12.31 percent in the year 2018.

STAN will have to relook its deployment of non-current assets and the output therefrom, as it seems the bank is not benefiting much from its investment in non-current assets. The bank must work on increasing its non-loan interest income especially, exploit income opportunities in fee and commission services, and also harness the income potential in its loan portfolio.

4.18 UBA

120.00

100.00 100.00 100.00 100.00 100.00

80.00 61.54 60.00

Efficiency Efficiency Score 40.00

20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 25: UBA efficiency estimates

The year under review saw UBA as among the leaders of the industry in all aspects of efficiency, the major area of improvement came in cost efficiency where there was a 62.50 percent enhancement.

Management will have to consider the following areas to increase the bank’s performance, higher return in the non-loan interest income portfolio, follow strategies that will increase loan income while minimizing loan loss and push for more fee and commission income as it is a major driver of the bank’s revenue.

4.19 Zenith Bank

120.00

100.00 100.00 100.00 100.00 87.33

80.00 86.64

60.00 46.42

Efficiency Efficiency Score 40.00 34.76

20.00

- Tech eff Rev eff Cost eff Prof eff

2018 2017

Figure 26: Zenith Bank efficiency estimates.

ZEN suffered declines in three of the four efficiency indicators, namely technical by 53.58 percent, 13.36 percent in revenue efficiency and 60.20 percent in cost efficiency in the year 2018. The case of technical and cost inefficiency should be a great concern to the shareholders of the bank as a prolong existence of this decline will not help the bank. It seems the bank is paying high price for its inputs given the current output levels.

Specifically, the deployment of resources towards non-current assets should be given a second look to result in improved return. The bank should also diversity its depositor base to reduce its cost of loanable funds. In addition to this management should reconsider the portfolio mix generating non-loan interest income as the current mix is not yielding much return for the bank. With respect to loan income, the bank should work at improving its performance by offering loan products that rake in good returns. These should also be efforts geared at increasing the patronage of products and services that rakes in fee and commission income.

CHAPTER 5: DEPOSITORY INSTITUTIONS STABILITY IN GHANA; A MIRAGE OBJECTIVE FROM ONE REFORM TO ANOTHER.

Monetary authorities around the world embark on policies that aim at ensuring the financial stability of deposit-taking institutions. Although these policies are well intended, assurance of financial stability is almost impossible as economic shocks irregularly make financial stability an elusive objective to achieve.

The Ghanaian depository institutions have a history of many reforms targeted at financial stability. Yet the banking sector has not been spared, and in recent times poor loan management, insufficient bank capital, liquidity challenge, related party transactions and fraudulent bank license makes up the top five reasons for bank failures in Ghana. Other reasons such as poor corporate governance, insider dealings and regulatory infractions cannot be left out. The fiscal cost of 2016 to 2018 banking sector clean up in Ghana is 7.25 percent of GDP.

A chronicle and analysis of these contributory factors is therefore paramount in the quest of maintaining the stability in the banking sector in current times and in the future. Proactive supervision and the avoidance of regulatory forbearance as well as a supportive macro environment will help the Bank of Ghana and by extension other central banks manage bank failures and bring the depository financial institution industry to near stability.

5.1 Introduction

It has been well research that well-functioning depository institutions and the banking sector, in particular, is important for every economy to achieve its set objectives in an efficient and effective manner. In many economies, especially developing ones the attainment of macroeconomic objectives and financial intermediation objectives which is channeling funds from lenders to borrowers with productive investment projects is mostly hinged on series of reforms including financial and banking sector reforms.

The banking history of Ghana has it that in 1896, the Bank of British West Africa which became Standard Chartered Bank in 1985 started operating in Gold Coast now Ghana with its first branch in Accra. It was followed by the Colonial Bank in 1918, which later merged with Anglo-Egyptian Bank, the National Bank of South Africa and Barclays Bank and became known as Barclays Bank. Between, 1920-1950 these two banks namely the Bank of British West Africa and Barclays Banks were the only banks operating in the Gold Coast. The first indigenous bank, Ghana Commercial Bank was established in 1953 to reduce the control of the banking sector by the two expatriate banks. In the year 1957, Ghana attained its independence from British control. The name Gold Coast was changed to Ghana, the Bank of Ghana (BoG) the central bank was established immediately after independence to take control over the management of the country’s currency and monetary needs. The state from this time assumed a major role in setting up the financial services infrastructure, it was not just about the infrastructure but the state was a major player in the financial services industry as well. During this period many state-owned banks were established including the National Investment Bank, Agricultural Development Bank, Bank for Housing and Construction, Merchant Bank, the Social Security Bank. These banks were not

68 permitted to operate purely as private entities but rather with governmental interference which heavily impacted on their ability to intermediate efficiently. With this development many of these banks deployed poor banking practices which culminated in huge non-performing loans by 1983.

Banking sector reforms in Ghana have mainly been enveloped in the financial sector reforms embarked on by the government as part of making the financial sector the driver of economic growth. From Aryeetey (1994), Ghana since independence in 1957 through to 1983 has pursued strategies that were mainly public-sector led focusing on inward-oriented trade anchored on meeting social welfare objectives. Prominent during this period were directives and policies of government to banks and mainly through state-owned financial institutions to support project reasoned on social and political considerations; credit facilities were therefore directed at the agriculture sector, in particular, was positioned as a priority area of the economy. In the midst of all these was the implementation of interest rate ceiling on both deposit and credits couple with a high rate of inflation. These according to Sowa and Acquaye (1999) resulted in financial repression, which forestalled the development of the financial sector alongside the allocation of bank credit to particular sectors under political influence. A major result of these conditions at this time in the history of Ghana was a lack of confidence by citizens in the financial sector.

Between 1976 and 1983, the economy of Ghana could be described as in crisis; this was worsened by poor economic growth and a severe balance of payment problems. In an attempt to resolve the economic crisis the government embarked on an Economic Recovery Program from 1983 to 1986, the objective was to restructure the economy and reverse the trends of economic delay. It therefore came as little surprise that the government of Ghana, in conjunction with the World Bank introduced financial sector reforms with a Financial Sector Program (FINSAP) in 1987. The aims of the financial reforms from the work of Antwi-Asare and Addison (2000) were:

i. to establish a sound prudential and regulatory framework for banking operations; ii. to ensure uniform accounting and auditing standards for all banks; iii. to put in place a more effective Banking Supervision Department (BSD) endowed with the requisite personnel and skills to enforce the prudential rules and regulations and a code of conduct for the banking sector; iv. to create a framework for restructuring distressed banks with the intention of transferring their non-performing assets, which had choked their balance sheets and stunted initiative in credit operations, to a new government agency, the Non-Performing Assets Recovery Trust (NPART); v. to engage efficient top management for distressed banks; vi. to develop fully liberalized money and capital markets in Ghana.

The result of the financial reform on the banking industry is evident in the interest rate liberalization, decontrol of credit allocation, and the removal of non-performing assets from the bank's statement of financial position to the Non-Performing Asset Recovery Trust. Other additional results were to increase competition and innovation, especially in financial products and services. These reforms also led the establishment of the Ghana Stock Exchange, the Securities and Exchange Commission and the enactment of the Banking Law (PNDC Law 225). The period between 1983 to 1999, can be described as the transitory phase of the financial sector of Ghana, this was the period that the state reduced its presence in the financial sector and pursued policies

69 that gave greater room for the private sector to participate in the financial sector. Figure 27 gives an overview of the spread of institutions that comes under the regulatory function of the Bank of Ghana.

Figure 27. The structure of the Deposit Taking Financial Institutions Industry in Ghana From Figure 28 we see the trend in the deposition taking institutions in Ghana from 2004 to 2018. The surge is in the microfinance institutions (MFIs), the sharp increase in number from 2012 to 2017 is partly attributable to the BoGs policy of improving financial inclusion. The Deposit Money Banks (DMBs) accounts for nearly 85% of the value of the depository financial institutions market. The 15 percent of this market is shared between the Non-Bank Financial Institutions (NBFIs) which comprises the Savings and Loans Companies and the leasing companies, microfinance, Rural and Community Banks (RCBs)and microcredit institutions. The trend in the

NBFIs industry relatively stable compared to the DMBs. The RCBs number have been stable over the period.

600

500

400 DMBs

300 NBFIs RCBs

200 MFIs

100

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 28. Trend of Deposit - Taking Financial Institutions in Ghana

The objective of this write up is fourfold; first, chronicle events that have raised massive concerns among stakeholders of depository financial institutions, secondly analyse the major causes of these events, thirdly, discuss interventions that has been enforced by the central bank and fourthly, proffer solutions aimed at forestalling the repetition of these events in the future.

5.2 Financial Sector Reforms and Stability

The theoretical support for financial sector reforms for many developing countries is from the works of McKinnon (1973) and Shaw (1973), who posited that the main cause of financial repression in these economies was mainly due to the dominant role played by the state in the economic activities. The financial sector for these states was characterized by directed credit, controlled interest rates, high reserve requirements and state ownership of most of the financial institutions. In as much as the presence of these features works against a free market system, many of these countries after attaining independence continued with the nationalist agenda were the desire to unite the citizenry for a new national economic agenda followed strongly after putting aside the colonial hegemony. Although this approach had some success in the short term, the pursuit of this national economic growth spearheaded by the state was not feasible and workable

71 in the long-term. It, therefore, came as little surprise that many of these newly independent countries had to go through financial and economic difficulties few years after independence when globalization and capitalism became the popular strategy for growing economies around the world.

The literature on financial stability takes two strands, those that present the phrase financial stability and those that use financial instability. Supporters of the financial stability school of thought include Crockett (1997), Lager (1999), Foot (2003), Large (2003) and Padoa‐Schioppa (2002). Schinasi (2004) summarizes financial stability as a condition in which an economy’s mechanisms for pricing, allocating, and managing financial risks including credit, liquidity, counterparty, and markets are functioning well enough to contribute to the performance of the economy. The European central bank in 2007 defined financial stability as “a condition in which the financial system-comprising financial intermediaries, markets and market infrastructure - is capable of withstanding shocks and the unraveling of financial imbalances, thereby mitigating the likelihood of disruptions in the financial intermediation process which are severe enough to significantly impair the allocation of savings to profitable investment opportunities” (ECB (2007)). According to Lager (1999), the objective of financial system stability is the avoidance of disruptions to the financial system that is likely to cause significant costs to real output. In a sample of 18 OECD countries, Monnin and Jokipii (2010) reveal that banking sector stability is an important driver of future GDP growth they further added that sustained banking sector stability precedes real output growth and that banking sector instability is followed by higher uncertainty about output growth.

Depository financial institutions stability is this paper is presented as the probability of deposit- taking financial institutions will not be able to perform its mandatory functions. For banks, in particular, this can be said to the banking sector’s probability of default. This definition overs the static case of crisis or non-crisis state of stability over a dynamic framework that captures a range of states that represent the inability of deposit-taking financial institutions to perform their mandatory functions.

The proponents of financial instability include Mishkin (2000), Davis (2001), Davis (2001), Ferguson (2003) Chant (2003) and Allen and Wood (2006). Ferguson (2003) described financial instability using three features i) a situation where some important set of financial asset prices seem to have diverged sharply from fundamentals ii) a situation where market functioning and credit availability, domestically and perhaps internationally, have been significantly distorted iii) aggregate spending deviates significantly, either above or below, from the economy’s ability to produce. Allen and Wood (2006) referred to financial instability as episodes in which a large number of parties, whether they are households, companies or (individual) governments, experience financial crises which are not warranted by their previous behaviour and where these crises collectively have seriously adverse macro‐economic effects.

The literature on financial institutions' failure from Caprio and Klingebiel (1996) and Lower (1997) classifies the causes of depository institutions' failure into internal and external. Internal causes include a weak internal control system, insider dealings, related party transactions, bad management practices and deteriorating bank capital. External causes may include, regulatory changes which may include financial deregulation policies, regulatory forbearance, poor external

72 audit practices, high inflation, currency depreciation, budget deficits and deterioration of terms of trade.

In the recent past, BoG has revoked licenses of some 70 microfinance and money lending companies because they failed to meet all the requirements to be given the green light to operate. According to an Asset Quality Review exercise undertaken by the BoG in 2016 contained in a press released in 2018, the governor of the BoG Dr. Ernest Kwamina Yedu Addison stated that, nine banks were identified as undercapitalized, further there was severe deterioration in asset quality in the banking sector which amounts to about 1.6% of GDP. The aftermath of this was that two banks in 2017 that is UT and Capital Bank were resolved through a Purchase and Assumption transaction as a strategy to ring-fence the troubled banks, and also to prevent spillovers to the rest of the banks and the economy as a whole. Good corporate governance practices were lacking in many of these asset quality positions of banks. Furthermore in August 2018 five banks were consolidated to establish the Consolidated Bank of Ghana. The issues for the consolidation included questionable bank capital and banking license acquisition, related party transactions, poor loan management hence high non-performing loans.

The developments in the Microfinance subsector comprising microfinance institutions (MFIs), money lending companies and financial non-governmental organizations, and RCBs cannot be said to be the best as many of them have suffered impaired capital; inability to meet regulatory capital adequacy requirement; low asset quality; and liquidity crises. With these developments, public confidence in the depository institution industry has dipped signaling a major obstacle to efforts at promoting financial inclusion. Table 26 provides a snapshot of the state of the microfinance sector in Ghana as of August 2018.

Table 16: State of the Microfinance subsector in Ghana Institutions Licensed Distressed Good standing Microfinance 566 211 137 RCBs 141 37 104

The governor of BoG further stated that in total, 272 out of the 707 institutions in the sub-sector, representing 38.5% are at risk. This in monetary terms amounts to approximately GHȼ740.5 million owed to an estimated 705,396 depositors of the distressed or folded up MFIs and RCBs. These deposits under distress form 8.81% and 52.49% of industry total deposits of RCBs and MFIs respectively. In the midst of all these, the banking industry in Ghana has witnessed increasing minimum capital regimes. The trend of bank capital over the years has been that in the year 1989 bank capital was $740,700, this increase to GHȼ7 million, then in 2008 bank capital was increased to GHȼ 60 million, in the year 2012, the minimum capital was GHȼ 120 million and the recent increase of GHȼ 400 million December 2018.

The history of the banking sector in Ghana can be summarized in the following epoch presented in Table 27, the period of state dominance 1957-1983, Financial Reform (FISAP) ERA, Post FINSAP 1983-1989, the period of Nigerian bank influx 2005-2015, and the period of depository institutions cleansing and reforms 2016-2018 and beyond.

Table 17. Major Events in the Depository Industry of Ghana Epoch Major Development 1957-1983 State Dominance in Banking Sector 1983-1986 Financial Crisis, Economic Recovery Program 1987 Financial Sector Adjustment Program 1989 Enactment of the Banking Law (PNDC Law 225) 2002 Bank of Ghana Act 2003 Commencement of Universal Banking 2005 Outpouring of Nigerian Banks into Ghana 2016 Banks and Specialized Deposit Taking Institutions Act (Act 930) 2017-2018 Banking Industry clean up, Ghc400 million capital, Moratorium on licensing new bank

The history of the depository institutions industry in Ghana, shows periods that the economy has experienced changes due to reforms in banking from the regulator in collaboration with multilateral organization like the World Bank, and IMF all aimed at building a robust and resilient financial sector, however the financial sector from time to time presents cases of failures that questions the success of some the reforms. The objective of the recent reforms by the central bank of Ghana was to clean up the sector and strengthen the regulatory and supervisory framework for a more resilient banking sector. The content analysis methodology was used to identify the causes of financial institutions' failure in Ghana over the past years using data from official press statements. The content analyses though does not present the much envisioned econometric estimations in stability studies still provide a good methodological approach that can support our analysis of these failures, an easy to read and assimilate method that would help identify the vital issues on banking institutions failure in Ghana. The data was sourced from official press releases BoG. The findings and recommendations will serve a good purpose in our understanding of depository financial institutions stability. 5.3 Factors and Results of Bank Failure

In the analysis of official press releases by the central bank from the year 2000 to January 2019. The central bank revoked the license of 70 microfinance institutions for failing the meet all the requirements needed to operate as microfinance companies after exhausting the six months provisional license period. These 70 microfinance companies are not part of the results presented in Table 28 and Figure 28.

Table 18: Recent Deposit Taking Institution Failures and Support Year Bank Type of Bank Final Decision 2000 Bank for Housing and Construction State and Commercial Liquidated GCB and ADB The Ghana Cooperative Bank State and Commercial Liquidated GCB and ADB 2014 DKM Private Microfinance Liquidated

2017 Capital Bank Private and Universal GCB Purchase and Assumption UT Bank Private and Universal GCB Purchase and Assumption

2018 Unibank Private and Universal CBG as Bridge Bank Beige Bank Private and Universal CBG as Bridge Bank Royal Bank Private and Universal CBG as Bridge Bank Construction Bank Private and Universal CBG as Bridge Bank Sovereign Bank Private and Universal CBG as Bridge Bank 2019 Heritage Bank Private and Universal CBG Purchase and Assumption Premium Bank Private and Universal CBG Purchase and Assumption 2019 Universal Merchant Bank Private and Universal GAT support Prudential Private and Universal GAT support National Investment Bank State and Universal GAT support Omni-Bsic Private and Universal GAT support Agricultural Development Bank State and Universal GAT support

In Table 29 in recent years, the universal banking industry has experienced a lot of bank failures. In the period ensuring from the asset quality review exercise of 2016, to the end of year December 31st, 2018, nine (9) universal banks had their license revoked all which happened to be private and local banks. In salvaging the industry as a whole the central bank adopted Purchase and Assumption and the Bridge Bank method to manage the assets and liabilities of these failed banks. This was the strategy adopted for the Private and Universal banks, while that of the state banks Bank for Housing and Construction and Ghana cooperative Bank was the absorption by GCB and ADB. The case of DKM was liquidation with Pricewatercoopers as the receiver.

The cost of the 2016 to 2018 banking sector bailout was estimated to be Ghȼ11.2 billion. This makes a colossal 7.25 percent of GDP using GDP at constant 2013 prices. This amount and its attendant's repercussions situate the banking sector of Ghana to be in crisis but for the timely intervention of the central bank although, the situation could have been avoided.

Reasons for Bank Failure in Ghana

20% 18% 18% 15% 16% 13% 14% 11% 12% 10% 8% 8% 5% 5% 5% 6% 3% 3% 3% 3% 4% 2% 2% 2% 2% 2% 0%

Figure 29. Reasons for Bank Failure in Ghana

From Figure 29, the reasons for bank failures identified from official release from the central bank shows that poor loan management which includes bad credit management and high-non performing loans accounted for about 18 percent of the mentioned reasons in all cases for the failures between the years 2000 to the year 2018. Although these banks are solely to be blamed to have bad credit management schemes, it also presents a serious need to relook the entire credit culture and support systems in the Ghanaian economy that should support credit business in the economy as bank credit is the most sought for business financing alternative. Again the intermediation function is greatly exposed if loans extended by banks cannot be repaid. Issues relating to bank capital also accounted for 15% of the reasons for these failures, bank capital here refers to inadequate capital, negative capital adequacy and impairment of bank capital. As bank capital serves as a cushion to depositors, any mismanagement of capital highly exposes depositors. Financial intermediation succeeds if depositors can have access to their deposit when needed, from the analysis and results presented in Figure 29, liquidity challenges, which included the use of liquidity support from the central bank, mismanagement of liquidity support and poor liquidity risk management makes up 13 percent of recent bank failure in Ghana.

Related party transaction mostly in the area of loan extension makes up 11 percent of the reason for bank failure, this was an indirect way of expropriating value from the depositor to owners of banks and their cronies. It is therefore of little surprise that these banks poorly managed their loan portfolio. Fraudulent banking licenses accounts for 8 percent of bank failures, these reasons question the regulators due to diligence responsibility in granting banking license a case of regulatory negligence. The corporate governance system in these banks makes up 5 percent of the reasons for these failed banks, poor and weak governance system made it possible for directors of these banks to expropriate value to themselves the case of perquisite and empire building was

76 clear, with some directors using depositor’s funds and liquidity support for non-banking related activities.

Closely related to the corporate governance failure was insider dealings in these banks which make up 5 percent of the reason. The case of regulatory infractions also accounts for 5 percent of these failures, as Unibank was cited as outsourcing bank service including teller and personnel service without regulator’s approval. Other reasons included exceeding single obligor limits, non – publishing of annual report, diversion of depositor fund and unsustainable interest rate in the case of DKM microfinance, breach of cash reserve requirement and insolvency.

In response to all these the Bank of Ghana, has introduced a new corporate governance directive, increased bank capital to Ghc 400million, is rigorously enforcing prudential reporting, undertaken a massive personal change at the banking supervision department. The law courts is being used by the central bank to hold directors accountable for their involvement in these failed banks.

5.4 Conclusion

This paper has revealed that the deposit-taking institutions' industry in Ghana despite many reforms has suffered some vulnerabilities, two-state banks failed in the year 2000, DKM failed in 2014, whiles 70 microfinance companies could not get approval because they failed in all license requirement in 2015. From the asset quality review in 2016 and banking reforms carried out in 2017 to 2018, two universal banks failed in 2017 whiles 7 banks also lost their license by end of the year 2018. The causes of these failures were mostly internal, poor credit/loan management, poor bank capital management, bad liquidity management practices, related party transactions, fraudulent bank licenses acquisition, weak corporate governance, regulatory infraction, and insider dealings whiles externally weak economic growth and currency depreciation can be cited as some of the factors that caused these banks to fail. It is estimated that the cost of salvaging the industry from the clean-up in 2017 to 2018 is about Ghc11.2 billion which amounts to 7.25 percent of GDP.

The reforms in place include the prudential reporting, new corporate governance directive for banks and special deposit-taking institutions, and a new minimum capital of Ghc 400 million. Whiles the deposit-taking industry cannot be fully insulated against future failures or vulnerabilities a proactive supervision strategy that penalizes wrongdoing and where regulatory forbearance is abhorred is needed to manage these wrong internal happenings. Another strategy is for the central bank to continuously insist on strong adherence to good corporate governance practice as most of the reasons identified for banks failures in Ghana are directly the results of poor governance. The central bank must also purse monetary policy objectives that would lead to economic growth and a stable local currency which will go a long way to reduce the likelihood of bank failures in the future.

CHAPTER 6: FINANCIAL LITERACY, A NECESSARY KNOWLEDGE AND SKILL TO POSSESS, WHO BEARS THE COST?

Individuals should be able to maximize benefits in their personal financial decision, however, evidence suggests that about 68 percent of adult Ghanaians do not possess the needed financial literacy and skills that will enable them to optimize the expected benefit in managing their finances. With financial markets increasing becoming complex and financial products becoming complicated a citizenry with greater proportion financially illiterate puts societal welfare at risk. Financial knowledge, and skills in managing money have both personal and national wide benefits.

Policymakers such as the Ministry of Education and Finance, implementing bodies such the Ghana education Service, the National Council for tertiary education, Bank of Ghana, Securities and Exchange Commission, the National Pension Regulatory Authority, Financial institutions and Payment service providers should provide financial and non-financial resources that can be used to improve financial literacy as the systemic effect of financial illiteracy cannot be compared to the meager cost of providing financial literacy.

6.1 Introduction

Making financial decisions is a lifelong activity that characterizes individuals and households; personnel finance, organizations; business finance, financial management or corporate finance and for the public; public finance at large. Many households are unable to optimize their financial resources and improve their financial wellbeing because they lack or possess little financial literacy. Being successful in managing financial resources, therefore, depends largely on financial knowledge. The rapid changes in the operations of financial markets and the complexity of financial products make the possession of financial literacy a fundamental knowledge and skill to possess if one is to navigate his way around the inevitable world of finance and maximize the benefits in financial decision making.

The factors contributing to financial illiteracy in frontier and emerging markets, including but not limited to the fact that personal finance is not part of the mainstream educational curriculum but in some business and investment programs at the tertiary level of education. This greatly exposes many students to financial illiteracy despite the formal education. Parents and teachers are in many instances illiterate on financial matters, predisposing their children and students to financial illiteracy. Besides environments with low banking habits make it difficult for financial literacy to be impacted and its skills to be deployed. There has been no concrete and sustained commitments from government and financial institutions in improving financial literacy in the past and in recent times. Lastly, financial markets are increasingly changing, with financial products becoming complicated day by day makes the possession of financial literacy a good piece of knowledge if one is to benefit from the changes taking place.

In Ghana, the recent depository financial institutions clean up, and the banking sector reforms or clean up, or crisis as some may choose to call it in particular the panic withdraw of funds from depository institutions to be precise indirectly indicates an appreciable level of financial illiteracy.

The Securities and Exchange Commission’s attempt at bringing sanity in the funds' management sector of the financial market implies that all is not well with that segment of the market. Furthermore, Amoah (2018), makes the point that, the pervasive threat of fraudulent investment schemes and unregulated investment schemes such as Ponzi, Pyramid and Network Marketing schemes in which investors are defrauded of their funds makes a strong case for a national investment in financial literacy in Ghana.

It must be emphasized that this write up is not about financial management, business finance, corporate finance or public finance but more of personal finance, in which finance literacy is greatly put to use. It goes without saying that financial literacy is also deployed in the aforementioned areas of finance. This piece has a threefold objective, first, explain financial literacy and its importance, second discuss strategies that can be used to improve financial literacy in Ghana. Finally, provide some recommendations on how to fund financial literacy.

6.2 What is financial literacy?

In the literature there is no consensus on the definition of financial literacy little wonder, many have used the term financial literacy, financial education and financial knowledge interchangeably. The Organization for Economic Cooperation and Development (OECD, 2005) defines “financial education” as: “The process by which financial consumers / investors improve their understanding of financial products and concepts and, through information, instruction, and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.”

The OECD defines financial literacy as a combination of awareness, knowledge, skill, attitude, and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing (OECD/INFE 2011:3). Also, the United States Financial Literacy and Education Commission (2007) describes financial literacy as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” In 2018 the OECD released the OECD/INFE Toolkit for measuring financial literacy and financial inclusion, this questionnaire toolkit, is an updated version of the toolkit welcomed by G20 leaders in September 2013.

In the work of Remund (2010), financial literacy is grouped into categories (1) individual’s knowledge of financial concepts, (2) individual’s ability to communicate about financial concepts, (3) individual’s aptitude in managing personal finances, (4) individual’s skill in making appropriate financial decisions and (5) individual’s confidence in planning effectively for future financial needs. These definitions put together presents financial literacy as functional knowledge in finance that equips individuals with skills to be able to take financial decisions that optimize financial resources at a personal level.

The literature identifies two types of financial literacy. The basic financial literacy according to Van Rooij, Lusardi and Alessie (2011), has questions set that test concepts such as numeracy, inflation, interest compounding, money illusion, and diversification. Sophisticated financial literacy focuses on an extensive set of questions on advance areas in finance and investments. In

79 addition to functions of stock market, knowledge of mutual funds, relation between interest rates and bond prices, company and stock fund, long period returns, highest fluctuations and risk diversification.

From Klapper, Lusardi and Van Oudheusden (2015) in the S&P Global Financial Literacy Survey, many countries in Africa and South Asia have adult populations with low financial literacy. The survey also infers that 68 percent of adults in Ghana are financially illiterate. Adam, Boadu and Frimpong (2018) provides evidence from a survey of retirees in Cape Coast Ghana, they hold the view that males score high in financial literacy from a test conducted covering general knowledge in budgeting, use of automated teller machine, time value of money, account types and insurance with particular emphasis on computational ability. This evidence shows that financial illiteracy is widespread in Ghana.

Berry, Karlan and Pradhan (2018) focused on the youth in Ghana, through an experiment in government-owned primary and junior high schools, they opined that financial education if not accompanied by social education, led children to work more compared to an integrated curriculum. In harnessing the benefits of financial literacy at the macro level, Baidoo, Boateng and Amponsah (2018), posits that financial literacy can improve the savings culture of Ghanaians, which will in the long term transmit into investment and sustainable economic growth in Ghana.

6.3 Importance of financial literacy Investment in financial literacy is a form of human capital investment with a huge individual benefit and welfare benefits to the state as a whole. The individual who possesses financial literacy is well-positioned to partake in the activities of the financial market and benefit from it compared to those who are not financial illiterate. The financial literate person is most likely to be financially included, borrow from financial institutions and have a good debt payment behavior. Any state with a large citizenry possessing financial literacy has a high probability of aggregating huge sum of excess funds in the form of savings available for deployment in productive sectors of the economy for growth in the long term.

Possessing financial literacy makes it possible for one to actively participate in the financial market, be it to save, invest funds or to borrow from the market. Some evidence supporting this assertion is that individuals with low financial literacy are more likely to have problems with debt management (Lusardi & Tufano, 2009). In making financial investment decision Yoong (2011) show that financial literacy and individual’s reasoning ability influences his decision to invest in stocks. For the youth, Lusardi (2015) preaches that financial literacy is crucial and a valuable skill to possess, if they are to maximize their benefits in financial decisions.

When market conditions change it is expected that investors will also change their investment strategy to benefit from the changes taking place on the market, however many individual’s lack of or with low financial literacy, keep holding onto debt at high rates even they can refinance their debt with lower rates. Many individuals with low financial literacy lose out on rebalancing their investment when market rates change favorably. The choice of debt servicing be it interest at a fixed or floating rate is also not considered by borrowers with low financial literacy. The findings from Lusardi and Mitchell (2007b) are that individuals who lack financial literacy make poor

80 investment choices. The possession of financial literacy will equip individuals to taken advantage of favorable financial market movements and influence the financial choice of the consumer.

Many individuals follow the life cycle hypothesis in managing their financial resources. In this hypothesis according to Modigliani and Brumberg (1954) and Friedman (1957) individuals pattern their spending according to the stage of life they find themselves. They save the excess of their high income for future use when they will not be in a position to increase their income, by this the individual income for his / her entire life is the average of the entire income earned throughout his / her life. In taking this savings decision to preserve funds for the future, the issues of interest rates, risk diversification, the choice of investment be it financial or non-financial must be considered and financial literacy comes in handy during such times. From Van Lusardi and Alessie (2011), there exists a strong and positive relationship between financial knowledge and retirement planning explaining that those who are more financially knowledgeable are more likely to plan for retirement.

The pension sector reforms around the world and the recent pension reform in Ghana in particular from a single-tier public pension scheme to the three-tier pension scheme in which the government is gradually moving from a public sector-led pension system to a private sector-led pension system means individuals must plan their retirement and build the pensions that they can use during their non-working years. Moreover, the change in the traditional external family support for the aged in Ghana to nuclear family support makes retirement and pension planning more of the individuals’ responsibility. For many individuals, the financial conduit in building their pension is through investment in financial instruments. The choice of these investments is greatly dependent on financial literacy. Interestingly and assuring enough is that, retirement planners are able to accumulate more wealth for retirement than non-planners, Lusardi & Mitchell (2007a). Almenberg and Save-Soderbergh (2011) collaborate this view by pointing out that in Sweden, the significant difference exists in finical literacy for individuals who have retirement plans compared to those who do not plan for retirement.

At the societal level financial literacy is important, the issue of public debt and its sustainability, pension management, fiscal bailout among other for managers of the economy and policymakers is greatly influenced by voters who select political leaders. If decision-makers and voters are ignorant about key financial accounting concepts, they are exposed to elect individuals who may greatly take an inefficient financial decision and its consequent wastage in public borrowing, public debt and public financial management.

Occasionally monetary authorities such as the central bank publish information that contains macroeconomic variables such as interest rates, inflation and other monetary interventions among others to the public. These economic data is aimed at informing the public about monetary policy intentions. Individuals who are financially literate stand a higher chance of making use of these fundamental economic indicators in their financing and investment decisions. The recent panic deposit withdrawals in Ghana from depository institutions as a result of the banking sector clean- up and reforms can be partly be blamed on low financial literacy.

6.4 Ways to improve financial literacy

The Ministry of Education and the Ghana Education Service, and in particular the National Council for Curriculum and Assessment should consider making financial education part of academic curriculum at the pre-tertiary educational level, this will equip students with basic financial literacy concepts and hopefully develop their financial literacy skills as they manage their personal finances throughout their life. An integrated curriculum is preferred so students are not exposed to making money without developing their full potential.

At the tertiary level, the National Council for Tertiary Education can deploy policies that require educational institutions under its ambit to make financial education part of their university wide or college-wide courses. This financial education course should be compulsory for all non-business programs as most business programs have financial education embedded in their program. This will also prepare students with functional financial literacy knowledge and skills.

Another move available is that financial institutions can engage NGOs to promote financial literacy among their existing and potential clients. In this regard, Smart Campaign in collaboration with Accion International, Ghana, a financial advisory and Investment Company, and Financial Inclusion Forum Africa have started an initiative aimed at improving financial literacy and consumer protection among clients and potential clients of Accion. Financial institutions who stand to benefit should wholeheartedly embrace and support such initiatives. The mode can be through presentations and lectures to deliver financial literacy programs to address the needs of specific sub-groups of consumers the young or elderly, educated, illiterate among others.

The next strategy that can improve financial literacy is to incorporate financial literacy into various types of development programs: microfinance, microcredit, vocational education, skills training, business development, health and nutrition, agriculture, and food security programs. This will provide an informal way of acquiring financial knowledge and skills.

The financial literacy campaign week initiative in Ghana by the Ministry of Finance which started in 2008 should be revived. The campaign should not only be in Accra but in other cities across the country. Communication media such as Radio and TV can be utilized to run media campaigns on financial literacy. Also, the campaign should be organized in all senior high schools across the country. Publications in diverse forms, including books, brochures, magazines, booklets, pamphlets can be used. This will boost the impact that the campaign will have in the years to come.

6.5 Who bears the cost of improving financial literacy?

From the discussions so far the importance and the need for financial literacy is not in doubt since financial literacy is part of human capital development. The individual should be encouraged to pursue financial literacy by undertaking short and functional courses in personal finance. Financial institutions especially the banks, savings and loans companies, microfinance and providers of payment systems, Fintech companies should also support initiatives that aims at improving financial literacy. At the industry level, the regulators that are Bank of Ghana, the Securities and Exchange Commission and the National Pension Regulatory Authority should also contribute by providing funding and resources towards improving financial literacy. The Ministry of Education,

82 the GES should also provide resources if not financial to improve financial literacy. If the Ghȼ 11.2 billion bailout of the banking industry is anything to go by and is indirectly related to financial illiteracy then the Ministry of Finance should also make some financial resources available to support the improve financial literacy call in Ghana.

6.6 Conclusion

Because money is the dominator in all economic activities, the knowledge and skill needed to make optimal use of money are paramount for every individual. Financial literacy provides the needed knowledge and skillset to succeed in managing personal finance. In the literature financial literacy, financial knowledge and financial education are almost the same. The sole aim of financial literacy is to equipped the individual with knowledge and skills to make optimum use of his or her personal finance with its attendant’s societal and national-wide benefit. The ways to improve financial literacy is through formal classroom education at both the pre-tertiary and tertiary level of education. Informal education, through the use of NGOs, public education and awareness program in the print and electronic media. Individuals have a personal responsibility to make towards acquiring financial knowledge. Also stakeholders within the financial institution’s ecosystem should pool resources, both financial and non-financial to improve financial literacy. If all hands will be on deck, improving financial literacy in Ghana will not be an expensive venture to undertake.

CHAPTER 7: SHAREHOLDERS EXPECTATIONS AND HR IMPLICATIONS FOR CEOS: THE AFTERMATH OF GHȻ 400M MINIMUM CAPITAL

Long term profitability is the obvious indication of a firm’s ability to satisfy the principal claims and desires of employees and stockholders. Attaining sufficient profit will not only help banks to finance their growth agenda, but also provide the resources that are needed to achieve other corporate objectives. As a result, the growth of the bank is usually tied intricately to its survival and profitability as it remains the key measure of a firm’s corporate performance. This report examines how bank CEOs set goals to ensure the business achieves profitable return on their investment as well as create value for shareholders after they have invested huge capital into the banking business. This report reviews extant literature and identified key managerial strategies that can be adopted by CEOs of banks in Ghana to create value for stakeholders.

Strategy such as the balanced scorecard, which assesses the effectiveness of a firm’s business design by linking short-term tactics with long-term strategic objectives. The scorecard allows CEOs of companies to evaluate their institutions from four perspectives - financial performance, customer knowledge, internal business processes and learning and growth. The scorecard in addition, assists various banks to link long-term strategic objectives with short-term action through four management processes such as translating the vision, communicating and linking, business planning and feedback and learning. As the successful implementation of any strategy depends on a firm’s ability to attract and retain capable employees, we recommend that HR managers adopt different strategies that ensures the most effective and efficient use of their workforce.

7.1 Stakeholders Expectations The strategic direction of almost every business organisation is guided by three core objectives – survival, growth and profitability (Pearce & Robinson, 2013). A bank that cannot survive in the banking industry will be unable to satisfy the aims of any of its stakeholders. Profitability is often considered the mainstay goal of business organisations and as such, a bank that is in business must be profitable. Regardless of how profit is measured or defined, long term profitability is the obvious indication of a firm’s ability to satisfy the principal claims and desires of employees and stockholders. Attaining sufficient profit will not only help banks to finance their growth agenda, but also provide the resources that are needed to achieve other corporate objectives. The profit generated by any firm represents the ultimate source of funds that the firm need to prosper and grow. Profitability remains the key measure of a firm’s corporate performance over the long term. Accordingly, the growth of the bank is usually tied inextricably to its survival and profitability. Growth in the number of markets served, including branches, the variety of products offered to customers and the technologies used to provide goods or services often lead to improvements in the bank’s competitive position.

As shareholders have invested huge capital in the banking business due to the rise in bank’s minimum capital requirement, it is important that bank CEOs set goals to ensure the business achieves profitable return on investment as well as create value for shareholders. One way of delivering on this mandate is to systematically define and then measure value creation in their

84 operations. It has been recognised that companies that adopt the strategy of value creation must not only consider hard financial indicators, but also other factors that drive profitable growth as they track corporate performance (Huckestein & Duboff, 1999). These factors are usually referred to as strategic objectives. The achievement of these strategic objectives (e.g., strong brand name, bigger market share, lower cost relative to key competitors, higher product quality than rivals and superior on-time delivery of services) including financial objectives, will ultimately increase shareholder value. The shareholders expect a fair and steady rate of return on investment, an increase in the future earning of the bank as well as an increase in the market capitalization. Such shareholders will readily advocate for company policies that promote long-term growth and sustainability. It is important that bank CEOs are aware of such expectations to guide their strategic decisions and actions in the competitive business environment. Even as the CEOs are pre-occupied with the agenda to meet shareholders expectations, we suggest they should also be mindful of the expectations of other stakeholders including customers, employees, the general public and the government. While customers demand for quality services and products at a fair price and fair terms, employees, on the other hand, expect secured jobs, recognition and equitable remuneration and improved standard of living. Similarly, the general public expects banks should be socially responsible and the government also expects these financial institutions to be legally compliant. They are expected to fulfill their tax obligations, obey the labour law and every law regulating employment and the banking industry. As it has been argued, the premise of maximization of shareholder value may necessarily demand the pursuits by directors of wider social and economic goals, so far as this is consistent with the enhancement of shareholder value (Tudway & Pascal, 2006). Meeting the expectations of the various stakeholders in the banking industry is critical for survival, growth, profitability and competitive advantage. 7.2 How can the Banks Create Value for Shareholders Firms may adopt different strategies to create value for various stakeholders. Nevertheless, the most commonly used method is the diagnostic measure known as the balanced scorecard, which assesses the effectiveness of a firm’s business design by linking short-term tactics with long-term strategic objectives. The scorecard allows CEOs of companies to evaluate their institutions from four perspectives – financial performance, customer knowledge, internal business processes and learning and growth. The balanced scorecard is a management system that can be used as the central organizing framework for key managerial processes such as departmental and individual goal setting; business planning and allocation of capital resources; strategic initiatives; and feedback and learning. It does not only provide opportunity for leadership of the firm to get their priorities, but also serve as a vehicle to the company for achieving those priorities. The use of the scorecard will provide avenue for Ghanaian banks to track financial performance while at the same time monitoring progress in building their capabilities and acquiring the intangible assets that is needed for the company’s future growth (Kaplan & Norton, 2000). Kaplan and Norton suggest that companies that seek to transform themselves and compete successfully based on available information, must learn to exploit their intangible assets instead of mere investment and management of physical assets. These authors comment further that managers who are using the balanced scorecard do not have to solely depend on short-term financial measures as the key

85 pointers of the company’s success. The scorecard assists them link long-term strategic objectives with short-term action by introducing four new management processes namely translating the vision, communicating and linking, business planning and feedback and learning. The first process, translating the vision enables top management to build a consensus around the organisation’s overall aspiration and strategy. Accordingly, for Ghanaian banks to enjoy enduring success, they are required to espouse and enact certain core values that remain stable while their business strategies and practices endlessly adapt to a changing global environment (Collins & Porras, 1996). The best intentions and future aspirations of the banks, drawn up by senior management, must be defined in a clear and memorable way (Kenny, 2014). It should be appealing and motivating to all employees and various stakeholders. The strategic vision of the bank must be integrated in the in the bank’s way of doing business at all levels in order to meet customers’ expectations. They must be expressed as a unified set of objectives and measures, that is agreed upon by all senior executives, that is often describe as the long-term drivers of organisational success. According to Collins and Porras, a well-conceived vision consists of two major components – core ideology and envisioned future (Collins & Porras, 1996). Core ideology defines the bank’s enduring characteristics such as consistent identity that transcends product or market life cycles, technological breakthroughs, management trends and individual leadership styles. It is also important that banks identify their core purpose – the bank’s reason for being in business. An effective purpose, it has been argued, reflects people’s idealistic motivations for doing the company’s work. Envisioned future on the other hand, consists of the bank’s 10 to 30 years audacious goal as well as a vivid description of what it will be like to achieve the goal. It is essential that individual banks recognise that such audacious goal represents a powerful way to stimulate progress. It serves as a unifying focal point of effort and acts as a catalyst for team spirit (Collins & Porras, 1996). Communicating and linking, which is the second process, helps managers to communicate their strategy from top to bottom while linking it to departmental and individual objectives. Even though departments are traditionally evaluated by their financial performance where individual incentives are tied to short-term financial goals, the balanced scorecard provides managers with some level of autonomy to ensure that all levels of the organisation understand the long-term strategy and as such both departmental and individual objectives are congruent with the overall strategic goal of the firm. Thus, every senior executive and manager should explicitly communicate their short- and long-term strategic intentions to their employees and evaluate individual’s performance based on the set targets. As companies generally fail at implementing strategy or managing operations because they lack a central management system to integrate and align these two vital processes, it is crucial for the banks to make sure that their strategies are integrated in the company’s operating and support processes. The next process entails the integration of business and financial plans. More often than not, managers face the daunting tasks of implementing diverse change programmes designed by different professionals that seeks to help organisations achieve their strategic goals. As some of these change programmes become confusing to managers, they are encouraged to use those

86 ambitious goals set for balanced scorecard measures as the basis for allocating resources and setting priorities, they can undertake and coordinate only those initiatives that move them toward their long-term strategic objectives. The fourth process is feedback and learning. This process relates to the capacity of the company to systematically review its processes to examine whether the entire company, various departments and individual employees are able to achieve their budget financial goals. The use of the balanced scorecard allows a company to monitor its short-term results from three additional perspectives – customers, internal business processes and learning and growth. Thus, the scorecard enables companies to modify their strategies to reflect real-time learning. Bank management can employ this process where banks will learn from their own experiences by collecting performance measures, creating aspiration levels based on their own past performance or other banks in the industry, and then changing organisational activities if the performance is lower than the aspiration level (Greve, 2003). This mechanism is simple self-regulatory where banks may attempt to reach a goal not currently attained. By obtaining performance feedback, they will be able to learn from their mistakes, take the needed corrective measures, implement desired changes and go further than previous achievement level. Treacy and Wiersema (1993) also suggest that strategies must centre on delivering superior customer value through either operational excellence, customer intimacy or product leadership. Operational excellence is a specific strategic approach to the production and delivery of products and services. It involves providing customers with reliable products or services at competitive prices which are delivered to them with minimum difficulty or inconvenience. Companies that employ this strategy work to minimise costs by reducing overhead, eliminating intermediate production steps, reducing transaction costs and optimising business processes across functional and organisational boundaries. According to Treacy and Wiersema, firms that implement this strategy typically restructure their delivery processes to focus on efficiency and reliability. They also use state-of-the art information systems that emphasise integration and low cost transactions. Customer intimacy involves producing goods and services to fit an increasingly refined definition of the customer. It implies segmenting and targeting markets precisely, and tailoring products and services to match those niches. Companies that excel in customer intimacy combine detailed customer knowledge with operational flexibility so they can respond quickly to almost every need of the customer. They create customer loyalty and respond quickly to almost any customer need. Employees in customer-intimate companies go to great lengths to ensure customer satisfaction with low regards for initial cost. These companies understand the difference between the profitability of a single transaction and the profitability of a lifetime relationship. As a result, they value and maintain good relationship with their customers. The final strategy is product leadership. It involves offering customers leading-edge products and services that consistently enhance the customer’s use or application of the said product. This strategy recommends that banks strive to produce a continuous stream of state-of-the art products and services. In pursuance of this strategy, the banks must challenge themselves in three ways. First, they must be creative – recognising and embracing ideas that usually originate outside the company. Second, such innovative companies must commercialise their ideas quickly. Thus,

87 business and management processes have to be engineered for speed. Third, product leaders must ceaselessly find new solutions to the problems that their own latest products and services have solved. Still, in the words of Treacy and Wiersema, “product leaders do not stop for self- congratulations; they are too busy raising the bar” (p. 89). In addition to value creation, the shareholders also expect bank CEOs to develop strategies as the banking market evolves. They are required to:  adopt best management and good corporate governance practices  ensure a healthy and consistent bottom line  achieve high reputation and brand image  put in place management control measures for proper checks and balances  be transparent and responsible, socially and environmentally

7.3 Implications for HR Managers The success of every strategy depends on the input, hard work and commitment of both management and employees. As a result, a firm’s ability to attract and retain capable employees is essential for success and achievement of competitive advantage. We encourage HR managers of various banks to adopt different strategies that ensures the most effective and efficient use of their workforce. Notable among these strategies are: First, recruitment and selection strategy that integrate employee recognition programmes into the recruitment and selection process by ensuring that hard working and committed employees are promoted to higher positions within the organisation. This promotion-from-within policy is an effective form of employee motivation and retention. For any bank to outperform its competitors, it must have the right people in the right postings. These individuals must be well equipped and supported to perform their assigned tasks effectively while behaving in a manner that is consistent with the desired culture of the bank. As a result, we suggest that the HR managers of Ghanaian banks must develop a global mind-set to enable them to effectively recruit and select the most qualified job candidates (either local employees or expatriates) for vacant positions, as well as retain them in order to achieve strategic objectives of the banks. Second, reward management policies with good compensation and benefits that ensure hard working employees are adequately rewarded. Reward management is concerned with the formulation and implementation of strategies and policies that help the organisation to reward people fairly, equitably and consistently in accordance with their value to the organisation and thus help the bank achieve its strategic objectives. Employees’ compensation and benefits should be tied to their performance and contribution to the achievement of the organisational strategic objectives. Employees who feel they are unfairly rewarded may become resentful and hostile if they perceive their colleagues are paid far more for similar responsibilities or job roles. It has been argued that resentment may lead to specific behavioural responses including anger, stress and violence (Mark & Folger, 1984), which is not good for any work environment especially service- oriented firms like the banks. HR managers of the banks should have a well-structured reward system and policies that guarantee employees are equitably rewarded for their contribution, sacrifice, experience and job performance.

Third, banks’ HR managers should learn to adopt flexible work arrangement practices such as a compressed work week; flexible working hours; job sharing; remote working and virtual office; and reduced working hours and voluntary reduced work time. Flexible work arrangements involve enhancing worker satisfaction through job redesign, including changing job conditions such as timing or number of working hours and work location. The principal aim is that working hours should be flexible enough to allow the achievement of other personal goals. When well planned and executed, flexible work arrangements could enhance the capacity of Ghanaian banks to meet peak demand and service outside hours, reduced work pressure, lower absenteeism, higher retention of the workforce, improved job satisfaction and increased employee commitment and motivation (Wood et al., 2013). Fourth, strengthen employer-employee relations by recognising employees as legitimate partners in the bank service delivery process. In banks that are unionised, management must accepts collective bargaining agreement as an appropriate mechanism for establishing workplace rules. The content of the collective bargaining agreement should be strictly adhered to, so as to ensure industrial peace and harmony. Thus, employees should be governed according to the terms and conditions of the employment contract. On the contrary, those banks that do not have unions, we suggest, bank HR managers adopt the proactive HR management approach. The proactive HR management approach recommends the following:  Job security policies that protect the job of not only full-time bank workers but also fair, just and humane treatment of contract workers.  Promoting from within the bank that encourages training and development of employees  Profit-sharing and employees stock ownership plans for employees who are exceptional in contributing to the achievement of the bank’s strategic goal.  High involvement management practices that ensures employee involvement in strategic decision making and policy formulation  Open-door policies and grievance procedures that ensures top management is accessible to all workers, employee grievances are also handled fairly and justly.

As management of a company’s workforce is a shared responsibility, we suggest all HR managers of banks must work hand-in-hand with executives from different departments and branches in order to formulate suitable policies and procedures for the purposes of estimation of human resource needs; recruitment and selection; training and development; motivation; compensation; discipline and employment termination (Ball, Geringer, McNett, Minor, 2013). When bank employees are effectively and efficiently managed, they will become more capable, competent and motivated to deliver superior performance, helping the bank to gain competitive advantage in the industry.

CHAPTER 8: INDEPENDENT CENTRAL BANKS AND FINANCIAL SECTOR DEVELOPMENT IN AFRICA

Ghana's financial sector has been through a series of regulatory related developments in recent times. Particular has been then reforms in capital requirements which saw a number of banks merge and others closed down. The preservation of this new banking capital requirements will depend on the prevailing economic circumstances including price stability. While the role of political and legal institutions in promoting financial development has been broadly examined, the exploration of economic institutions’ roles is nascent. Still, there is evidence that monetary institutions affect financial development by being able to influence the level of inflation and expected inflation, government expenditure, government debt and interest rates; in this sense, the classic case for central bank independence. Given that price stability is key to growing the financial sector, it is argued that having an independent central bank that ensures price stability, can lead to a stronger financial market which will drive financial inclusion and support productive investments.

The main purpose of this write up is to present stylised facts on CBI and other related economic variables and establish a link between CBI, institutional quality and financial development in Africa. In terms of inflation, fiscal performance and financial development, the data suggests that Africa lags behind. There are suggestions, these could be due to low levels of political/legal institutional quality in Africa. In Africa, CBI does not significantly promote financial development. However, CBI promotes financial development more in countries with strong political institutions. This implies that CBI reforms should be done in tandem with political institutional reforms so as to achieve maximum benefits from the policy.

8.1 Introduction Ghana's financial sector has been through a series of regulatory related developments in recent times. Particular has been then reforms in capital requirements which saw a number of banks merge and others closed down. The preservation of this new banking capital requirements will to a much extent depend on the prevailing economic circumstances including price stability and government's presence in the markets. There exists a wide body of literature on understanding the factors that determine the development of financial systems Key among these are institutional factors. Poorly developed financial markets, such as those in Africa and some other developing countries, are characterised by high information and transaction costs, and institutions matter to the extent that they are the fundamental roots of these costs. While the role of political and legal institutions in promoting financial development has been broadly examined and established, the exploration of economic institutions’ roles is nascent. Still, there is evidence that monetary institutions affect financial development by being able to influence the level of inflation and expected inflation, government expenditure, government debt and interest rates; in this sense, the classic case for central bank independence as argued by Rogoff (1985). The regulation and supervision of the financial system has also been identified as an important determinant of its development. Studies have examined the impact of regulations like capital requirements, restrictions on activities, deposit insurance and private monitoring on bank risk-taking and

90 soundness, there is also an established link between the architecture of the supervision system and financial. Within the framework of establishing the Economic Community of West African States (ECOWAS), Southern African Development Community (SADC), The West African Monetary Union (WAMU) and the Euro-Mediterranean zone, African countries have revised their central bank status for the purpose of ensuring a much larger autonomy and curbing inflation as a major objective of their monetary policy. The evidence supporting this widespread policy advice, however, is not robust, particularly for developing countries. Many African countries, have been unable to achieve the convergence goals for the ECO which include single digit inflation, fiscal- deficit of not more than 4% of GDP, and the central bank's financing of fiscal deficit at not more than 10 per cent of the previous year's tax revenue, among others. Given that price stability is key to growing the financial sector, it is argued that having an independent central bank that ensures price stability, can lead to a stronger financial market which will drive financial inclusion and support productive investments. Having price stability and bank regulatory and supervisory independence is important to ensuring financial stability. The main purpose of this section is to establish a link between CBI, institutional quality and financial development in Africa. Although, like many other countries worldwide, African nations have promulgated laws granting increasing independence to their central banks, Africa's financial system is characterised by a dominant banking sector and low activity level on the capital markets. Domestic bond markets are woefully small or non-existent thereby limiting access to long term capital. Financial instruments are basically short term and financial inclusion is still low. Cost of credit is very high thereby excluding many from participating in the financial system (Bascom, 2016).

Table 19: Financial Development in Africa, Other Developing and Developed Countries Interest rate Financial access and outreach spread Depositors Borrowers Automated Lending rate with from Commercial teller minus deposit commercial commercial bank branches machines rate banks banks

per 1,000 per 1,000 per 100,000 per 100,000 percentage

adults adults adults adults points 2016 2016 2016 2016 2016 Africa 292 35 5.3 5.82 7.3 Other Developing 657 22 9.6 9.64 4.2 Developed 1,967 .. 17.3 62.17 .. World 1,141 .. 12.5 47.55 5.7 Source: World Development Indicators (2017)

140

120

100 Ghana South Africa 80 Uganda 60 SSA

40 Developed Dveloping 20

0 1990 2000 2008 2009 2010 2011 2012 2013 .

Figure 30: Broad Money (M2) as a percentage of GDP Source: Authors' own computation, World Development Indicators (2017) As Table 29 indicates, Africa performs poorly in terms of depositors per thousand, commercial bank branches per 100,000 adults, and ATMs per 100,000 adults relative to other developing countries and the world average. The lending deposit spread is also comparatively high compared to other developing countries and the world average. This poses significant challenge for access to finance and financial development in Africa. In Figure 30, we see significant differences in financial sector development measured as broad money as a percentage of GDP, among three (3) African countries - South Africa (the biggest economy in Africa), Ghana (a small but fast-growing economy) and Uganda (a very small economy). We also see that Ghana and Uganda have relatively less developed financial markets compared to other developing countries. Given the negligible difference in CBI provisions among Africa, other developing countries and developed countries in Figure 30, but a significant lag in the development of Africa's financial systems relative to other developing countries and developed economies, this section seeks to establish the extent to which CBI has been an effective tool for financial development in Africa. Private agents trust the central banker only if effective rules on accountability and transparency hold. Agoba et al., (2017, 2019(a) and 2019(b)) also show empirically how legal independence cannot be considered a sufficient condition for avoiding the political pressures on the monetary policy stance. The literature surveyed in this area indeed indicate that poor institutions that manifest, for example, in poor creditor protection in African countries and other developing nations have had effects on both the level and the variability of credit. Subsequently, this section also examines the degree to which the level of development of political institutions affects how effective CBI is in promoting financial development in Africa. On average, compared to other developing countries, political/legal institutional quality is low in Africa, although there are differences among countries in the region in terms of rule of law, good

92 governance and respect for civil liberties (see Figure 31). Figure 31shows that political rights in other developing countries have also been on the rise but has been consistently higher than that of Africa over the period. As at 2016, whilst Africa scored 2.5 out of 6, other developing countries averaged 3.1. Developed countries scored the highest among the three samples though there has been some decline in recent times.

Figure 31: Political Rights (rescaled 0-6), 1970-2016 Source: Freedom House In 2016, developed countries scored 5.2 compared to 3.1 for other developing countries, and 2.5 for African countries. For countries like Comoros, the ratings have increased as a result of having constitutional rule restored. Similarly, Cote d’Ivoire, where the number of registered voters for elections increased significantly, and Zambia, which experiences improvements to its judiciary, have seen improvements in their ratings for political rights. This situation can have serious implications for the impact CBI reforms will have on financial development on the continent. 8.2 Central Bank functions and Central Bank Independence Central banks have generally had three (3) main objectives or functional roles: (i) To maintain price stability, subject to the monetary regime in current operation, for example the gold standard, a pegged exchange rate or an inflation target; (ii) To maintain financial stability, and to foster financial development more broadly; (iii) To support the state’s financing needs at times of crisis, but in normal times to constrain misuse of the state’s financial powers. Central Bank Independence is generally seen as the delegation of monetary policy to unelected officials and the restriction of governments’ influence on monetary policy. The theoretical case for CBI rests on countering inflationary biases that may occur for various reasons in the absence of an independent central bank. One reason for such a bias is political pressure to boost output in the short run for electoral reasons irrespective of longer term costs. Another reason is the incentive for politicians to use the central bank’s power to issue money as a means to finance government spending. The inflationary bias can also result from the time-inconsistency problem of monetary policy making. In a nutshell, this is where policymakers are perceived as not credible, believed to have an incentive to renege in the future on promises made in the present day to keep inflation low.

Assessing the independence of a central bank can be done on two different levels; (i) legal/formal independence on one hand and then (ii) behavioural/informal/actual independence. Legal/formal central bank independence is derived from the legal framework/charter that establishes and defines the operation of the central bank. By examining the central bank's charter, political economists rely on indicators that measure the extent to which: (i) government has veto over bank policy; (ii) government determines the appointment, dismissal, and term duration of central bank governors; (iii) the central bank has control and participates in the budgetary process; (iv) price stability is a primary policy goal for the central bank; (v) the central bank exercises control over monetary instruments; and (vi) there are limitations on the central bank's ability to finance budget deficits in order to determine central bank independence (Presnak, 1989). Informal/actual independence has been measured using the central bank governor turnover rate within a period. The assumption of this measure is that, a higher rate of governor turnover is an indication of a high level of central bank dependence or control of the central bank by government. This measure, however, has been criticised for many reasons. Having an extremely low rate of governor turnover such as observed in Zimbabwe, for example, signals one of three (3) things: either a high level of informal/actual central bank independence; the presence of a dictatorship regime, or a very subservient central bank governor. This makes the interpretation of this measure quite unreliable. 8.3 CBI in Africa At independence most African governments had little experience with inherited Western style government systems and therefore struggled to maintain power and prove the legitimacy of their regimes. Consequently, new African leaders became violent in their attempt to directly control as many institutions as possible in the society, including central banks. Presnak (1989) noted for example that: " Oppressive laws in Zimbabwe allowed the government to maintain control over nearly every facet of society. In a country where civil society is largely lacking in freedoms, the central bank stands little chance in pursuing policies that run counter to the government’s desires. This was the case in Zimbabwe, explaining its low formal independence rating, and low governor turnover rate expected from an authoritarian state." Thus, it is clear that for central banks in developing countries such as Zimbabwe, the central bank’s legal independence is distinct from its actual behavioural independence. In many developing countries, banking institutions were nationalised while politicians twisted monetary policies to benefit them and their loyalists, leading to widespread corruption and unsustainable economic policies. These may be the reasons why earlier studies found no relationship between formal independence and inflation but rather found a relationship between governor turnover rate and inflation in developing countries. Since then, many African states have initiated central bank reforms meant to make them independent; however, conversations about the independence of African central banks still raises a lot of questions pointing generally to a lack of credibility. For example, it has been noted that fiscal spending, particularly in election years, result in central banks having to mop up excess liquidity in the system. Additionally, there is high turnover rate of central bank governors after change in governments, which signals political authorities wanting to gain control over monetary policy. This, it has been argued, reflects the low quality of political institutions in the region.

Political instability, which is common in many sub-Saharan African countries, negatively affects macroeconomic policy and outcomes, as new governments change central bank governors and have varying monetary and economic policies preferences. The results are rising inflation rates. Neumeyer et al., (2005) found that there were positive correlations between output and interest rates in developed countries but negative correlations between output and interest rates in developing countries; these correlations are explained by the differences in institutional quality between developed and developing countries With many African central banks missing various announced targets, the capacity of the financial systems within which they operate has also been identified as a contributory factor to the ineffectiveness of central bank reforms on economic performance. While in developed countries, the presence of well-developed financial systems motivate the need for low inflation and therefore drive the establishment and sustainability of independent central banks, in developing economies, the need to finance government expenditure and that of private banks and industrialists lead to the establishment of central banks. Also, poorly developed financial markets mean governments cannot rely on finance from the local markets and therefore have to resort to alternatives such as central bank financing which is inflationary in nature. Thus, according to Maxfield, in developing countries, there are two (2) main factors which drive the emergence of central banks: the nature of underdeveloped financial markets, and the resultant need of alternative sources of finance for public expenditure. Faced with limited financial markets, developing countries would want to capitalise on the international financial markets. Having an independent central bank in this case would be helpful for such countries to gain legitimacy and credibility with international creditors as having an independent central bank is viewed by many lenders as indicative of the commitment of the government in pursuing sound economic policies. Knowing this, many governments initiate central bank reforms without proper commitment to them. Thus, there are legally independent banks operating in very limited and inefficient financial markets and poor political institutional environments. The under-developed and inefficient nature of the financial systems mean that opposition to inflation is low, financial markets are incapable of providing more accurate information to the central bank and the central bank is unable to widen the scope of monetary policy due to relatively high levels of financial exclusion (Tita and Aziakpono 2017). It also means central bank governors and board members are confronted with threats of being dismissed and being subject to the dictates of political authorities who do not respect the laws in place.

8.4 Stylized facts 8.4.1CBI reforms

Table 30 shows that fifty-two (52) countries had at least one (1) CBI reform between 1970 and 2014. In forty-eight (48) countries there were at least two (2) CBI reforms, forty-three (43) countries had at least three (3) CBI reforms, twenty-one (21) countries had at least four (4) CBI reforms, three (3) countries had at least five (5) CBI reforms and one (1) country had at least six (6) CBI reforms within the period. In all, the majority of the countries in the sample had two (2) and more CBI reforms within the study period. Though there may not be much time variation in the CBI index, there exists significant variations in CBI among countries.

Table 20: Frequency of CBI reforms by country from 1970-2014 Total reforms per country Frequency Percent Cumulative (countries) 0 14 7.69 7.69 1 52 28.57 36.26 2 48 26.37 62.64 3 43 23.63 86.26 4 21 11.54 97.80 5 3 1.65 99.45 6 1 0.55 100.00 Source: Garriga (2016)

In Figure 32, we see that out of the 350 CBI reforms, 116 took place in Africa, 242 took place in developing countries, and 108 took place in developed countries between 1970 and 2014. This means that globally, most CBI reforms have taken place in developing countries. Among developing countries also, a significant portion of CBI reforms occurred in African countries.

300 242 250

200

150 116 108 100

0 Africa Developing Developed

Figure 32: Number of CBI reforms from 1970-2014

Source: Author’s own computation based on Garriga (2016)

Figure 33: Averages of CBI in Africa, Other Developing and Developed Countries

Source: Author's own computation based on Garriga (2016)

As seen in Figure 33, average CBI has increased across Africa, other developing countries and developed countries. However, as of 2016, developed countries had higher levels of de jure CBI compared to Africa and other developing countries. The rise can be attributed to increases in the four (4) major components of CBI, namely personnel independence, policy independence, central bank objectives and financial independence. Most of these reforms have focused on making price stability the sole objective of central banks; accordingly we see that central bank objectives experienced the most significant increase from 0.17 to 0.53. In Figure 43, independent central banks in Africa have a CBI index ranging between 0.25 and 0.87. The most independent central bank is that of Guinea Conakry and the least is Mozambique. Ghana ranks 23rd out of 50.This may not necessarily translate into actual central bank independence rankings, as some governments do not adhere to the CBI provisions of these central banks.

1 0.8665 0.9 0.8 0.7 0.560667 0.6 0.5 0.4 0.3 0.245588 0.2 0.1 0 Mali Togo Egypt Benin Kenya Sudan Ghana Guinea Nigeria Uganda Somalia Burundi Lesotho Rwanda Ethiopia Tanzania Morocco Botswana Cameroon Zimbabwe Ivory Coast South Africa Sierra Leone Central African…

Congo, Republicof Figure 34:CBI rankings in Africa Source: Author's own computation based on Garriga (2016) 8.5 Inflation The main aim of central bank independence reforms, is to achieve price stability/lower inflation. Inflation in Africa has declined moderately and to stable levels after a surge in the 1970s attributable to oil price shocks. It later became endemic in the region due, in many cases, to pressures faced by authorities in charge of monetary policy to provide finance, which is inflationary in nature, as a way of managing the large fiscal deficits and high debt levels that had occurred. About half of countries in the African region recorded double-digit inflation from 1980 to the mid-1990s. A quarter of African countries recorded inflation rates in excess of 20% (World Bank, 2017). Inflation declined to single digits in the late 1990s in about half of African countries. Monetary authorities have been mostly successful in containing inflation arising from high food and energy prices between 2008 and 2011. In countries like Ghana, the response has not been as successful as in the countries discussed earlier. Inflation rate in Ghana increased in 2008 to 16.5 percent from 10.7 percent in 2007. This was in spite of an increase in the policy rate from 13.5 percent early 2007 to 17 percent in late 2008. It subsequently declined from 16.5 percent in 2008 to 13.1 percent in 2009 as a result of a further increase in the policy rate to 18.5 percent in early 2009. Between 2010 and 2012, Ghana experienced single digit inflation of 7.7 percent in 2011 and 7.1 percent in 2012. The policy rate had declined by about 500 basis points within that period. However, from 2013 it surged from 11.7 percent to a peak of 17.5 percent in 2016 though the policy rate had increased from 15 percent to 25 percent. At the end of 2017, inflation in Ghana stood at 12.4 percent with a policy rate of 20 percent. As seen in Figure 35, Africa has had higher average inflation compared to developed and other developing countries since 1970. From about 4.7% in 1970, inflation rose significantly within 5 years to 17.6%. Thereafter, the region experienced a declining inflation rate, though still higher compared to developed countries. Within the period however, countries in Africa had lower

98 inflation compared to other developing countries. This continued up until 1996 when it went up to a record 27%, the highest compared to developed and other developing countries and world averages. However, since then, the average inflation rate for Africa has declined to about 7% in 1998, 8% in 2000 and 5% in 2004. It increased marginally from 2005 to 2010 to about 10.2%. The lowest average inflation for the region in the past 40 years was recorded in 2012 which was about 4.8%. As at 2017, the region's average inflation rate was about 7%. For other developing countries, highest inflation recorded over the period 1970-2017, was 25% in 1996. This was after inflation had begun to decrease from 1980 until 1990 when it rose to about 12%. It further rose to 15.1% in 1992, declined to 9.8% in 1995, then went up to 25% in 1996. From there, it has declined to 4.7% in 2002 and 2004, the lowest rate in the period. After 2004, it rose to 11.8% in 2010, declined to 4.9% in 2012, increased to 7.8% in 2014 and has declined from there to about 5.6% in 2017. In developed countries, inflation rates have been relatively lower compared to those of other developing countries, both within and outside of Africa. Inflation rates rose from 1970 from about 5.7% to 15.1% in 1976. It however declined to 9.1% in 1980 and increased again to 14.2% in 1980. It remained stable up to 1981 after which it fell significantly to 4.9% in 1989. It rose to 6.5% in 1992 and declined to about 3% in 1998. Inflation rates in developed countries have been declining since then to rates close to about 0.2% as of 2017.

Figure 35: Average Inflation Rates Source: World Development Indicators (2017) In 2017, average inflation rate in emerging markets and developing economies was 4.4% while that across Africa was 11.2%. Headline inflation slowed across the region in 2017 amid stable exchange rates, and amid slowing food price inflation due to higher food production. Asia and the Pacific region recorded inflation of 3.2% compared to that of Europe which was 2.2 percent. 8.6 Financial Development and the role of an independent central bank

Central bank independence is associated with lower levels of inflation. Cukierman et al. (1992) show that legal independence is a significant determinant of price stability in industrial countries. During part of the Great Moderation between 1984 and 2003 Taylor (2013) considered changes in monetary policy to be a major reason for improved economic performance (measured by

99 variability of output and inflation) in the United States. Agoba et al (2017), however, find no impact of central bank independence on inflation in Africa and other developing countries. The transparency in CBI monetary policy decision making, it is argued, has important economic benefits as it reduces inflationary expectations and makes the central bank accountable for its decisions (Papadamou et al. 2017; Stiglitz, 1998 and Eijffinger and van der Cruijsen 2007). Papadamou et al., (2014) find that a higher level of monetary policy credibility produces lower interest rates, higher effective exchange rates, and a positive effect on economic activity.

Price stability can have two positive impacts for financial market participants, notably bond investors. The first effect is that lower inflation means lower short-term interest rates to boost credit demand. With lower short-term policy rates, intermediate and longer-term rates also tend to decline. Since bond prices and yields move in opposite directions, lower yields mean rising prices and a higher principal value for fixed-income investors, thereby boosting bond market development. The second impact is on real returns on bonds. With price stability, the real returns on bonds are high compared to periods of high inflation where the real or inflation adjusted returns are much lower compared to the nominal returns. This can go a long way to affect the development of the bond market. A clear example exists in most African countries, where with high inflation rates among others, domestic bond markets are under-developed. The central bank can also finance government deficits by drawing down on its reserve which are monies generated through the central bank's banking functions. These funds could be useful for the purchase of foreign exchange to guarantee exchange rate stability. This consequently affects the foreign exchange risks that the financial markets are exposed to (Nwaogwugwu, 2005) as well as the stability of prices through exchange rate-pass through effect.

The importance of CBI for financial development lies primarily in its ability to ensure price stability for the banking sector, stock and bond markets. Though central banks do not directly engage in the provision of financial services to the populace, their monetary policies create the environment to enhance or inhibit the functions of financial institutions. Through various monetary policy tools such as policy rate, reserve requirement and open market operations, they can expand or contrast money supply and credit availability, thus defining the extent of access to finance. However, the aspect of central bank independence that matters for access to finance is the price stability guaranteed by CBI.

When policies such as monetary policy, exchange rate policy, and credit policy are taken away from the purview of governments, it places constraint on the extent to which the state can intervene in such matters. Furthermore, because there is a statutory limit on the credit government can obtain from the central bank, and the independent central bank can raise interest rates to deter government from borrowing, fiscal discipline can be influenced by the independent central bank. Central banks that have autonomy from government succeed in withstanding pressure to finance government's deficit spending. In doing so, money supply is controlled particularly in election periods. By being independent, the central bank can refuse to finance government budget deficit through printing money. By guaranteeing the tenure of office of central bank governors as well as limiting the control of government in the appointment and dismissal of a central bank governor, inflationary expectations are lowered. This should lead to lower wage increase negotiations as well as lower changes in prices of goods and services. This should encourage certainty in financial transactions and evaluation of projects by the financial system. In cases where the central bank is involved in

100 prudential supervision, CBI could have a direct impact on the functioning of banks. Literature finds that higher central bank independence improves the soundness of banks, particularly in the case of smaller banks, which is enhanced during crisis. Independent regulators exercise professionalism and consistency in supervising the financial condition of banks. Furthermore, bank regulatory and supervisory independence is important in ensuring financial stability for reasons akin to why CBI matters for monetary stability.

Data from the World Governance Indicators (WGI) as shown in Table 31, Table 32 and Table 33 (see on next page), indicate that, across various measures of good governance, there have been significant improvements in Africa, and other developing countries. While Africa scored -1.4 in the rule of law in 1996, it made some gains and was -1.0 in 2006. On the issue of political stability and absence of violence and terrorism, while Africa scored -0.9 in 2016, this was not a significant gain compared to -1.0 in 1996. When it comes to voice and accountability, Africa scored -0.9 in 2016 compared to -0.6 for other developing countries and 1.1 for developed countries. In all, though there have been some improvements, these gains are still low and require much more improvements. Table 21: Institutional quality in Africa 1996 2000 2005 2010 2012 2014 2016

Rule of Law -1.4 -1.2 -1.2 -1.1 -1.0 -0.9 -1.0 Political Stability and Absence -1.0 -0.6 -0.2 -0.7 -0.6 -1.1 -0.9 of Violence/Terrorism Voice and Accountability -0.9 -1.1 -1.0 -1.1 -1.0 -0.9 -1.0 Source: Worldwide Governance Indicators (2017)

Table 22: Institutional quality in Other Developing Countries 1996 2000 2005 2010 2012 2014 2016

Rule of Law -0.5 -0.9 -0.6 -0.8 -0.7 -0.7 -0.6 Political Stability and Absence -0.5 -0.1 -0.3 -0.5 -0.3 0.0 -0.2 of Violence/Terrorism Voice and Accountability 0.1 -0.1 -0.2 -0.5 -0.5 -0.4 -0.6 Sources: Worldwide Governance Indicators (2017)

Table 23: Institutional quality in Developed Countries 1996 2000 2005 2010 2012 2014 2016 Rule of Law 1.5 1.6 1.5 1.6 1.6 1.6 1.7 Political Stability and Absence 0.9 1.1 -0.1 0.4 0.6 0.6 0.4 of Violence/Terrorism Voice and Accountability 1.3 1.3 1.3 1.1 1.2 1.1 1.1 Source: Worldwide Governance Indicators (2017)

Another measure of institutional quality is the Corruption Perceptions Index (CPI) which is a global measure of the perceived levels of public sector corruption. Compiled by Transparency International, the CPI uses a scale of zero (0) (highly corrupt) to 100 (very clean). There is an

101 important relationship between corruption and freedom of expression, in that in order to expose corruption and the unjust causes of it, there is a need for freedom of expression. According to Transparency International, countries with lower levels of corruption are also strong in protecting the rights of journalists and activists. On the other hand, in countries where corruption is high, the voices of their citizens and media are easily stifled. Ordinary people are the worst culprits of corruption due to their inability to defend their rights and demand for basic needs. In the same vein, checks on abuse of power are weak as journalists are denied the opportunity to do so. Thus, when there is limited freedom of expression, it is more likely that corruption will greatly increase.

Over six billion people live in countries where corruption is pervasive due to the fact that out of the 180 countries assessed in the 2017 CPI index, more than two-thirds scored below 50. No country had a perfect score. As shown in Table 34, in 2016, many African countries rank lowly in the corruption perception index, compared to other developing countries and developed countries. The 10 least corrupt countries in Africa did not rank in the top 30, while those in other developing countries did not rank in the top 30 as well. But the 10 least corrupt countries in developed countries mostly ranked in the top 10 countries in the world. This should have pronounced implications for the use of government revenue and fiscal balances as would be explained in the next section. Table 24: Corruption Perception Index (Rankings of Top 10 least Corrupt Countries in Each Region) Africa Other Developing Developed Rank Country Score Rank Country Score Rank Country Score St. Vincent and the New 34 Botswana 61 40 Grenadines 39 1 Zealand 89 36 Seychelles 60 48 St. Lucia 38 2 Denmark 88 Carbo Finland 48 Verde 59 71 Vanuatu 55 3 85 48 Rwanda 54 77 Suriname 58 3 Norway 85 53 Namibia 52 81 Turkey 41 3 Switzerland 85 54 Mauritius 54 85 Solomon Islands 14 6 Singapore 84 Sao Tome Sweden 64 and Principe 46 91 Sri Lanka 21 6 84 66 Senegal 45 91 Timor-Leste 37 8 Canada 82 South 71 Africa 45 96 Thailand 38 8 Luxembourg 82 Burkina 74 Faso 42 107 Vietnam 40 8 Netherlands 82 Source: Transparency International Corruption Perceptions Index (2017)

8.7 The impact of political institutions on the effectiveness of Central bank Independence

Quintyn and Taylor (2002) argue that, among other things, CBI is a mechanism that mitigates the economic costs that are associated with a time-inconsistency problem. Similarly, a greater level of central bank independence from outside pressures encourages central banks that are less politically constrained to act in preventing financial distress (Cihák 2010). This is because, a more dependent central bank may be influenced by political interests associated with weak and less compliant financial institutions, leading to a lax in the exercise of central bank discretion in the exercise of

102 its powers to discipline such financial institutions. This can have implications for financial stability and confidence in the financial system. A dependent central bank that has close association with government may tend towards providing monetary finance to weak financial institutions, thereby creating an additional channel for the moral hazard problem (p. 160).

Posen (1995), noting that there are distributive consequences in the choices of monetary regimes, stated that there is no reason to assume that the adoption of central bank independence is self- enforcing; that choice requires political support. The literature shows that financial systems with a higher degree of legal/institutional development on average benefit more from financial liberalisation than those with a lower one. This provides further impetus for our investigation into the role of institutions in enhancing the impact of central bank independence on financial development. High-quality political institutions might generally be associated with greater trust in governmental decisions and legal arrangements. As a result, the quality of political institutions might be a positive determinant of the reputation of CBI.

Preferences for price stability embodied by CBI require political support to insure against the risk to monetary institutions and to examine the monetary institutions themselves. Politically unstable countries are more often susceptible to political shocks leading to discontinuous monetary and fiscal policies and higher inflation volatility. Their study showed that greater political instability, lower economic freedom and higher degrees of polarisation and political fragmentation lead to higher inflation volatility. In addition, when political institutions such as the judiciary do not ensure the proper enforcements of contracts, this can impact the extent to which investors and creditors take advantage of the stable macroeconomic environment pursued by the independent central bank. The cost of contract enforcement, if high, can negate the benefits of low inflation and reduce the number and value of financial contracts in the economy. On the other hand, better enforcement of financial contracts can enhance the willingness of creditors and investors to engage in financial transactions and improve access to finance Capital liberalisation significantly improves financial development with a given level of institutional and legal development.

We argue that strong political institutions ensure that central bank provisions are respected since such systems will hold governments accountable for breaching such provisions. This should enable central banks effectively work towards achieving their objectives of price stability which financial markets need. In high political institutional environments, the credibility of central banks is high as little to no interference from government is expected. This enables the market to adequately rely on central banks' pronouncements and execute financial contracts with some degree of certainty. This enables projects to be properly evaluated and considered, given the stable macroeconomic environment. Subsequently, more projects are financed as banks can give more loans to projects deemed as profitable. In addition, investors are better able to take advantage of stable macroeconomic environment when there is political stability and a protection for them and their investment by the legal system. Information asymmetry is reduced thereby reducing the cost that high information asymmetry generates, besides inflation which feeds into determining the cost of credit.

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8.8 Regression and Correlation Results

The impact of institutions and macro-economic indicators on financial development has been well established in the literature. Among the macroeconomic indicators is inflation, which can reduce the real return of investors and therefore serve as a disincentive to investment. It also increases cost of credit and therefore reduces demand and availability of credit. With regards to bond market development, inflation reduces real returns as well as increases the chances of principal losses. This means that mechanisms to control inflation are key to promoting financial development. An empirical exploration of the importance of CBI for financial development in Africa, other developing countries and developed countries and the impact of political/legal institutions on the effectiveness of CBI in promoting financial development using panel data on 48 African countries from 1970 to 2012 has been conducted. The empirical paper, using the Two Stage System Generalized Methods of Moments estimation technique, can be made available upon request. (Agoba et al, 2019c).

The study found that CBI has no direct impact on financial development in Africa. However, in other developing and developed countries, it does. Meaning that higher CBI in other developing and developed countries, promotes financial development. The study also found that CBI promotes financial development to a greater degree in countries with strong political and legal institutions. Robustness checks reveal that CBI directly impacts financial development in upper middle and high-income countries and not in low and lower middle-income countries. This shows that the level of development of a country does determine the extent to which CBI impacts financial development. The policy implications are that central bank independence laws should be implemented together with other institutional reforms that strengthen the central bank's ability to be independent of political authorities. At the same time, strong economic reforms should be implemented to increase economic growth so that the impact of CBI on financial development is not eroded by poor economic policies.

8.9 Conclusion

This section presents stylised facts on the key variables, notably central bank independence, inflation, fiscal policy, financial development and institutions and compares Africa's data on these variables to that of other developing countries, developed countries and the world. It also analyses the conditions under which CBI is effective for financial development. We see that though there have been improvements in central bank independence, inflation, financial development, institutional quality and fiscal performance, Africa lags behind in comparison to other developing countries and developed countries. The policy implications are that central bank independence laws in Africa should be implemented together with other institutional reforms that strengthen the central bank's ability to be independent of political authorities. At the same time, strong economic reforms should be implemented to increase economic growth so that the impact of CBI on financial development is not nullified by poor economic policies in Africa.

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Appendix Abbreviations for Banks

DMU Name of Bank ACC Access Bank (Ghana) Limited ADB Agricultural Development Bank Limited BAR Barclays Bank Ghana Limited BARO Bank of Baroda Ghana Limited BEIG Beige Bank BOA Bank of Africa Ghana Limited BSCI Sahel Sahara Bank Ghana Limited CAL CalBank Limited ECOB Ecobank Ghana limited ENER Energy Commercial Bank Limited FAB First Atlantic Bank Limited FB First Bank Nigeria Ghana limited. FID Fidelity Bank Ghana Limited FN First National Bank Ghana limited GCB GCB Bank Limited GT Guaranty Trust Bank (Ghana) Limited HERI Heritage Bank Limited OMIN OmniBank Ghana Limited PBL Prudential Bank Limited PREM Premium Bank Ghana Limited REPU Republic Bank Ghana Limited ROYA The Royal Bank SCB Standard Chartered Bank Ghana Limited SG Societe General Ghana Limited SOVE Sovereign Bank Limited STAN Stanbic Bank Ghana limited UBA United Bank for Africa (Ghana) Limited UMB Universal Merchant Bank Limited UNIB UniBank Ghana Limited ZEN Zenith Bank (Ghana) Limited

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