A NEW DAWN ON THE PATH OF BUILDING A RESILIENT BANKING SECTOR IN GHANA.

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

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

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

Evans Sokro, Ph.D Lecturer, Central University Business School Contributor, CUUFIS

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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.

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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.

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

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.

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CUUFIS

Research

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]

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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 in the Banking and Finance Department of the Central University Business School. He holds a BSc Banking and Finance, MPhil in Business Administration Finance Option and PhD in Finance from the University of Ghana Business School. At Central University, Ben works as a lecturer in Investment, International Finance, Insurance, Financial markets, Banking and Financial Management at the undergraduate level. At the graduate Master of Business Administration (MBA) level, Ben teaches Advanced Corporate Finance and Financial Statement Analysis. He is also a course advisor for his department and the exams officer for the Banking and Finance Department at the Central University Business School. Professionally, Ben is a Ghana Stock Exchange and Securities and Exchange Commission Ghana certified securities professional and also an affiliate of the Association of Certified Chartered Accountants (ACCA-UK). Before joining Central University as a lecturer in October 2008, 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, pension 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 and Central Business School annual colloquium. He has published articles and book chapters in both local and international journals. He is also an adhoc reviewer for a number of international journals in the area of banking and finance.

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GLORIA CLARISSA O. DZEHA, Ph.D

Lecturer, Central University Business School Contributor, CUUFIS Email: [email protected] /[email protected]

Gloria Clarissa O. Dzeha is the Acting Dean of Students at the Central University. She isa lecturer in the Banking and Finance Department of the Central University Business School. She holds a Doctor of Philosophy in Finance and a Master of Philosophy in Finance from the University of Ghana Business School. She also holds a Bachelor of Science degree in Business Administration, Banking and Finance option and a diploma in Statistics from the University of Ghana.

Gloria‟s research interests span development financing, remittances, foreign direct investment, international finance and investment banking.

She has considerable teaching experience in several courses in finance including International Finance, Derivatives, Investment Management, Financial Markets, Monetary Theory, Managerial Economics, Elements of Banking, Commercial Banking and Contemporary issues in Finance. She was a lecturer at Datalink University College from 2009-2010 and was also an adjunct lecturer at the Chartered Institute of Bankers- Ghana from 2007-2013.

She has presented a number of seminars and conference papers both on international and local platforms including African Review of Economics and Finance at the Wits Business School of the Witwatersrand University in Johannesburg, South Africa, The 7th Annual Global Science and Technology Forum- Accounting and Finance Conference 2017‟ in Singapore, The African Finance Journal Conference in Cape Town, South Africa. Development finance Conference in Durban, South Africa. She has presented papers at the University of Ghana, College of Humanities annual School of Social Science Conference, University of Ghana Business School seminar series and Central Business School annual colloquium.

She is currently an Executive Member of the Finance Committee of the International Central Gospel Church, Christ Temple in Accra, Ghana. She is also the Board Chair of Patvid New Generation Schools, Accra Ghana.

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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 is currently a full time lecturer at the Banking and Finance Department, Central University, Miotso. His teaching expertise spans financial management of banks, banking operations and ethics, microfinance, international finance, electronic banking and innovations, and elements of banking. His academic and research interests include small and medium enterprises (SMEs), microfinance, credit management, corporate finance, financial development, financial inclusion, international finance, risk and insurance, central bank independence, monetary policies, capital structure and institutional quality.

Abel has authored and co-authored a number of journal publications in journals, two books for Central University‟s distance education program namely: Financial Management of Banks and Electronic Banking and Innovation, and presented some of his research work at international conferences.

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 professional ethic of hard work, dedication, honesty and good human relations with colleagues and students. He seeks to improve himself in every way possible and to develop strong local and international networks both in academia and industry to achieve common goals and visions.

Mr. Agoba is also a dedicated Christian with interest in youth work, and a proud member of the Institute of Chartered Accountants Ghana.

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EVANS SOKRO, Ph.D 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 is currently a senior lecturer and heads the Department of Human Resource Management at the Central Business School where he teaches courses in human resource management at the MBA and undergraduate levels. He is a Fellow, Institute of Human Resource Management Practitioners Ghana. Between 2013 and early part of 2014, Evans was the coordinator of business related programmes and chair of examinations committee at the Miotso campus of the Central University, Ghana.

Prior to joining Central University, Evans worked as the human resource and administrative manager for Eden Tree Limited and Jescan Construction Limited respectively.

Evans is an academic and researcher who has published a number of journal articles, book chapters and presented conference papers at international conferences including Australia and New Zealand Academy of Management (ANZAM) and European Academy of Management (EURAM) among others. His research interests include expatriation in sub-Saharan Africa, organisational culture and values, corporate social responsibility and human resource information systems.

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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.

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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

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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. Appreciation goes to Dr. Edwina Ashie-Nikoi for editing this report.

Professor John Ofosu-Anim Pro-Vice Chancellor Central University

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EXECUTIVE SUMMARY

The financial sector of every economy has long been established to play pivotal role in transforming economies and the lives of citizenry. It is little wonder that the financial market is highly regulated. In the past two years Ghana‟s financial services industry, especially its banking sector, has received much discussion both at the formal and informal levels. The concerns raised have touched on how safe the financial institutions industry is for participants, both at the macro and micro levels of the market. While we can comfortably say the current financial institutions industry in Ghana is nowhere near crisis, we acknowledge current events as periodic vulnerabilities that are not new in responsive financial markets. What is needed in the present– and in the future – is support, cooperation and partnership among stakeholders in the financial institutions industry ecosystem that would protect the confidence of all market participants.

The Central University Unit for Financial Studies (CUUFIS) positions itself within the stakeholder ecosystem that would provide cutting-edge scientific and practical research output that can contribute to building a strong financial services sector in Ghana. Our theme for this maiden banking sector report “A New Dawn on the Path of Building a Resilient Banking Sector in Ghana”, is important for two main reasons. First, the current developments in the banking sector of the economy namely new capital requirements, the strong call for good and effective corporate governance system for the depository institutions(which we perceive would have ripple effects on other sectors of the financial institutions industry), and the quest for an effective pre-emptive regulatory strategy are indeed new beginnings in building a financial services infrastructure that can support economic growth within the lower middle income economies category that Ghana finds itself. Secondly, for CUUFIS, this marks a new and humble beginning in our quest for becoming a reliable independent research centre in the financial services industry that would contribute towards the anticipated resilience, by answering questions and proffering solutions for both short and long-term practical research problems and unprecedented issues that confront practitioners on the financial institutions landscape.

What makes us 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 Bank Mergers and Acquisitions, Bank Capital and Managing Human Resources. We believe this approach will meet the interest of practitioners within the banking sector of the economy, and also enrich the readers‟ understanding on 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 party. Adelaide Kastner, Ph.D Acting Dean, Central Business School

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Table of Contents

ABOUT US...... ii Introduction ...... ii Our Mission ...... ii Our Vision ...... iii Our Goal ...... iii Our Method ...... iii Our Core Values - CICIRE ...... iii Our Relationships ...... iii Our Contributors ...... iv ABOUT THE AUTHORS ...... iv MESSAGE FROM THE VICE CHANCELLOR ...... ix Introduction ...... ix Applicable Research ...... ix A FOREWORD ...... xi EXECUTIVE SUMMARY ...... xii Table of Contents ...... xiii WHAT IS IN THIS REPORT ...... xviii 1.0 THE DEPOSIT TAKING INDUSTRY WITHIN THE GHANAIAN ECONOMY ...... 1 1.1 Introduction ...... 1 1. 2. The Economy ...... 1 1.2.1 Review ...... 1 1.3 Foreign Currency ...... 2 1.4 Money Market Rates...... 3 1.5 The Intermediation Market ...... 4 1.5.1 Deposit - Lending Rates ...... 5 1.6 Deposit Taking - Industry ...... 6 2.0 BANKING INDUSTRY PERFORMANCE ...... 8 2.1 Order of Analysis ...... 8 2.2 Bank Size ...... 8

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2.3 Deposit ...... 10 2.4 Loans ...... 12 2.5 Bank Intermediation ...... 14 2.6 Personnel Resources ...... 16 2.7 Personnel to Assets ...... 18 2.8.0 Interest Income ...... 20 2.8.1 Loan Interest-Income ...... 21 2.8.2 Fee and Commission...... 23 3.0 PROFITABILITY ...... 25 3.1 Risk Adjusted Return on Assets ...... 27 3.2 Return on Equity ...... 28 3.3 Risk Adjusted Return on Equity ...... 30 3.4 Asset Productivity ...... 31 3.5 Asset Efficiency ...... 33 4.0 BANK EFFICIENCY ...... 35 4.1 Bank model ...... 35 4.2 Technical Efficiency ...... 36 4.3 Cost Efficiency ...... 38 4.4 Revenue Efficiency ...... 40 4.5 Profit Efficiency ...... 42 4.6 Overall Performance ...... 44 4.7 Regional Presence Profitability ...... 46 5.0 TOPICAL ISSUES ON CURRENT DEVELOPMENTS IN THE BANKING INDUSTRY OF GHANA...... 48 5.1 Mergers and Acquisition ...... 48 5.1.1 Introduction ...... 48 5.2. Ghana Bank Mergers and Acquisition ...... 48 5.3 The other side of Bank Merger and Acquisition ...... 50 Conclusion ...... 51 6.0 BANK CAPITAL: WHAT WE NEED TO KNOW ...... 52 6.1 What is bank capital and the need for bank capital? ...... 52 6.1.1 Book Value of Shareholders' Equity ...... 53 6.1.2. Regulatory Bank Capital ...... 53

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6.2 The Basel Committee ...... 54 6.2.1 Basel Accords ...... 54 6.3 Arguments on Bank Capital ...... 57 6.3.1 The support for Bank Capital ...... 57 6.3.2. The other side of Increasing Bank Capital...... 57 6.3.3. Bank Capital and Competition ...... 57 6.4 Functions of Bank Capital ...... 58 6.4.1 The loss-absorbing function ...... 58 6.4.2. The confidence function ...... 58 6.4.3 The financing function ...... 60 6.4.4.The restrictive function ...... 60 6.5 Implication of additional Capital by Bank of Ghana ...... 61 6.6 Strategies to increase Capital ...... 61 6.6.1 Channels of adjustment ...... 61 7.0 MANAGING HUMAN CAPITAL IN THE SURVIVING BANKS...... 63 7.1 Introduction ...... 63 7.2 Work motivation ...... 64 7.3 Job satisfaction ...... 65 7.4 Job Performance ...... 65 7.5 Organisational Commitment ...... 66 7.6 Employees and Emotional Labour ...... 66 Conclusion ...... 67 References ...... 68 Images ...... 71 Appendix ...... 72

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TABLES

Table 1: Real GDP Performance ...... 2 Table 2. Ghana Cedi Exchange Rate ...... 2 Table 3. Deposit -Lending Rates ...... 5 Table 4. Licensed Banking and Non-Banking Financial Institutions ...... 6 Table 5. Bank Total Assets ...... 9 Table 6. Industry Deposit Share ...... 11 Table 7. Loans created ...... 13 Table 8.Bank Intermediation on the Market ...... 15 Table 9. Personnel Resources ...... 17 Table 10. Personnel Expense to Total Assets ...... 19 Table 11. Loan Interest Income ...... 22 Table 12. Fee and Commission Income ...... 24 Table 13. Return on Asset ...... 26 Table 14. Risk Adjusted Return on Asset ...... 27 Table 15. Return on Equity ...... 29 Table 16. Risk Adjusted Return on Equity ...... 30 Table 17.Asset Productivity ...... 32 Table 18. Asset Efficiency ...... 33 Table 19. Technical Efficiency ...... 37 Table 20. Cost Efficiency ...... 39 Table 21. Revenue Efficiency ...... 41 Table 22. Profit Efficiency ...... 43 Table 23. Overall Performance ...... 45 Table 24. Bank Regional Presence Performance ...... 47

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FIGURES

Figure 1. Ghc exchange rate……………………………………………………………………………………………………………..3 Figure 2. Trend of Money Market Rates…………………………………………………………………………………………….4 Figure 3. Trend Deposit-Lending Rates……………………………………………………………………………………………..6 Figure 4. Bank Interest Income 2016………………………………..………………………………………………………………20 Figure 5. Bank Interest Income 2017………………………………………………………………………………………………..21

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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 maiden 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 first of a series of research output envisioned by CUUFIS, we focus on the performance of banks for the period 2016 and 2017 and discuss pertinent issues such as bank capital, bank merger and acquisition and human capital management in view of recent developments in Ghana‟s banking sector. Data for the performance analysis was sourced from published annual report of banks.

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

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1.0 THE DEPOSIT TAKING INDUSTRY IN THE GHANAIAN ECONOMY

1.1 Introduction The banking industry in Ghana is classified as over-banked, fragmented, with intense competition from foreign banks and a fair ownership base between local and foreign banks. The state and concern about non-performing loans demands that monetary authorities adopt and implement policies that would protect the interest of all stakeholders in the banking sector. The decision to increase bank capital is expected to create a larger and stronger banking sector that would provide the needed funds to support growth taking place within the different sectors of the economy. The additional benefit of this move by the central bank is to control the likely impacts of systemic risk associated with a small, over-banked and fragmented banking sector. Further on, the need to tackle challenges that accompany financial sector deregulation and liberalization demands that owners of banks increase their capital as banks assume more risk in their operations.

This maiden CUUFIS report coincides with Central University‟s 20 year anniversary as a premier private tertiary institution in Ghana. This edition is structured into 5 sections. Section 1 considers the Ghanaian economy in global context with particular emphasis on the monetary sector while in Section 2; we review bank performance for the years 2016 and 2017 and assess different aspects of bank performance. Section 3 discusses bank Mergers and Acquisitions. Section 4 looks at Bank Capital. Section 5 is devoted to Human Resource implications of the current events in the banking sector.

1. 2. The Economy

1.2.1 Review

For the year 2017 information published by International Monetary Fund (IMF) reveal that there was a 3.8 percent global growth, the fastest since 2011. Other statistics show that for 2017, North Africa, Sub-Saharan Africa, Nigeria and South Africa recorded percentage growth in the economy of 2.6, 2.8, -1.6 and 0.6 respectively. Ghana, on the other hand, recorded a GDP growth of 8.5% in the year 2017. The IMF forecast the Ghanaian economy to grow by 6.3 percent in 2018.

The Ghanaian economy has started to show signs of recovery (Table 1). In the year 2017, the Ghanaian economy recorded a GDP growth of 8.5 percent compared to 3.5 percent in the year 2016. The major development within this real GDP growth was the industry sector which recorded a growth of 16.7 percent as against a negative 1.2 percent growth in 2016. A major contributory factor to the sector‟s growth was the improvement in energy and relative stability in energy supply to industry. As industry continues to grow, it is expected that its ripple effect

1 would be felt on the overall real economy in the coming years if the energy supply is improved and affordable to industry. The sharp increase in the agricultural sector of 8.4 percent in 2017 compared to 3.6 percent in 2016 can be partly attributed to government run agriculture initiatives such as the Planting for Food and Jobs campaign, agricultural mechanization, rehabilitation of existing irrigation infrastructures and the promotion of seed and planting material development. It is expected that the agricultural sector will continue to experience positive growth and in its wake propel the industry sector of the economy.

With the potential for industry to add value to agricultural produce, it is expected that continued positive growth in the agricultural sector will propel the industrial sector of the economy. The connection between agriculture and industry output and the service sector would have to be monitored so the services sector does not suffer at the expense of this agriculture - industry growth nexus. Over the period 2013 to 2017, there has been a downward trend in the services sector from a 10 percent in 2013 to a 4.3 percent in the year 2017. The trade-off that exists between agriculture, industry and services 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 Agriculture 5.7 4.6 2.4 3.6 8.4 Industry 6.6 0.9 1.2 -1.2 16.7 Services 10 5.7 5.7 5.9 4.3 GDP Growth 7.3 4 3.9 3.5 8.5 Source: Bank of Ghana Annual Report, various editions.

1.3 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. In Table 2 we provide the trends in the cedi‟s exchange rates against the three major trading currencies over the period 2013 to 2017.

Table 2. Ghana Cedi Exchange Rate Year 2013 2014 2015 2016 2017 Mean Std. Dev. Gh/US dollar 2.2000 3.2000 3.8000 4.2002 4.4200 3.5640 0.8925 Gh/Pound Sterling 3.6715 5.0000 5.6000 5.1965 5.9700 5.0876 0.8755 Gh/Euro 3.0982 3.9000 4.2000 4.4367 5.3000 4.1870 0.8014 Source: Bank of Ghana Annual Report, various editions.

The highest volatility in the cedi exchange rates is against the US dollar with a standard deviation of 0.8925, followed by the pound sterling 0.8755 with a comparable stable deprecation

2 against the euro. Figure 1 shows a downward trend of the cedi depreciation against these major currencies for the period 2013 to 2017. 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.

Figure 1:Ghc exchange rate There is some evidence of a structure 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 cedi„s depreciation 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.

1.4 Money Market Rates Figure 2 shows rates quoted on money market instruments have declined, indicating reduction of interest rates on the loanable funds market, all 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 2017, 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.

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Figure 2: 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 days 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 form the higher rates on the 182 days and 1 year notes, especially for 2016 and 2017.

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1.5 The Intermediation Market

Source: Suomenpankki.fi

1.5.1 Deposit - Lending Rates Deposit rates have been fairly stable, about 13 percent during the period 2013 to 2017 as presented in Table 3. However lending rates have been on the rise and peaked at 31.2 percent in 2016 and declined marginally to 29.3 percent in 2017. The lending deposit spread averaged 12.89 percent for the entire period 2013-2014.

Table 3 Deposit-Lending Rates

Rates % 2013 2014 2015 2016 2017 Inter Bank Rate 16.3 23.9 25.3 25.3 19.3 Average Lending Rate 25.6 29 27.5 31.2 29.3 Average Deposit Rate 12.5 13.9 13 13 13 Lending - Deposit Spread 13.1 15.1 14.5 18.2 16.3 Source. Bank of Ghana Annual Report various editions.

The increase in bank spread implies that the borrowing cost for loans from banks makes the cost of doing business with banks expensive. It also indicates an inefficient intermediation regime in the economy which mostly charges standard rates on borrowers without differentiating good borrowers from bad borrowers. Figure 3 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.

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Figure 3: Trend Deposit-Lending Rates

1.6 Deposit Taking - Industry

The number of universal banks at the end of 2017 was 34; however, with the forced merger of Unibank, the Royal Bank, Beige Bank, the Construction Bank and Sovereign Bank to form the Consolidated Bank Ghana (CBG) in August 2018, this had dropped to 29 as at the time of preparing this report. This is also against the backdrop of UT Bank and Capital Bank being put under receivership and absorbed by GCB in 2017. The number of universal banks is expected to shrink further as some may have to merge to meet the Bank of Ghana‟s (BoG) fresh Ghc 400 million capital requirement by the 31st December 2018.

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

On the non-banking financial institutions (NBFI) front, there were an additional 4 NBFIs entering the industry increasing the number from 64 in 2016 to 68 in 2017. The rural and community bank (RCB) segment of the deposit taking industry saw no change as the same 141 RCBs operated in 2016 and 2017. The microfinance (MFI) segment saw two new entrants

6 ending the year 2017 with 566 MFIs compared to 564 MFIs at the end of 2016. The number of licensed credit reference bureaus has been 3 through the years 2013 to 2017.

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2.0 BANKING INDUSTRY PERFORMANCE

Source: heidrick.com

2.1 Order of Analysis We compare the industry performance in 2016 and 2017 as a gauge of the performance of the economy. Further we conduct our analysis by comparing bank performance over the 2 year period 2016 - 2017 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. Banks‟ ownership is also analyzed to assess the performance of locally owned banks to foreign owned banks.

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. The industry recorded total assets of GHȼ78,144,370,193 in 2017, up from GHȼ74,503,602,431 in 2016. The average size of banks was GHȼ 3,010,000,000.00 in 2017 compared to GHȼ 2,570,000,000.00 in 2016.

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As Table 5 shows, Ghana Commercial Bank (GCB) is the biggest bank, ranked first in 2017 contributing 12.23% of industry total asset compared to 8.16% and a second position in 2016. Ecobank (ECOB) swapped its 2016 first position with 11.64% of the industry‟s assets, for second position in 2017 with 10.83% of the assets. Barclays Bank Ghana Limited (BBGL) improved its performance by becoming the third biggest bank in 2017 with 7.62% of total assets, compared to fifth position in 2016 with a score of 7.13%. Fidelity (FIDE) bank ranked fourth by way of total asset size of 6.88% in 2017, bettering its seventh position in 2016 with 5.63% of the industry size. Stanbic (STAN) Bank was the fifth biggest bank in 2017 with 6.74% of assets in the industry a drop from its 7.30% stake in 2016 and fourth position.

Table 5. Bank Total Assets 2017 2016 BANK Total Asset GHȼ % of Asset Rank Total Asset GHȼ % of Asset RANK GCB 9,558,151,000 12.23 1 6,049,604,000 8.16 2 ECOB 9,098,692,000 11.64 2 8,025,510,000 10.83 1 BBGL 5,954,035,000 7.62 3 5,288,817,000 7.13 5 FIDE 5,378,048,000 6.88 4 4,173,602,000 5.63 7 STAN 5,263,154,000 6.74 5 5,409,991,000 7.30 4 SCB 4,778,984,000 6.12 6 4,373,564,000 5.90 6 ZENI 4,670,895,909 5.98 7 3,403,744,767 4.59 10 CAL 4,212,638,000 5.39 8 3,599,355,000 4.86 9 ADB 3,545,143,000 4.54 9 3,035,493,000 4.09 11 ACCE 3,199,566,000 4.09 10 2,679,608,000 3.61 13 UMB 2,985,505,000 3.82 11 2,789,941,000 3.76 12 UBA 2,963,235,035 3.79 12 3,742,195,032 5.05 8 SG 2,789,742,286 3.57 13 2,448,836,201 3.30 14 PBL 2,184,835,000 2.80 14 1,631,151,000 2.20 16 REPU 2,079,096,000 2.66 15 1,856,171,000 2.50 15 GT 1,873,877,215 2.40 16 1,545,337,875 2.08 17 FABL 1,702,640,843 2.18 17 1,442,038,725 1.92 18 BOA 1,343,035,939 1.72 18 1,144,481,867 1.54 19 PREM 1,338,114,639 1.71 19 933,827,862 1.26 22 BSCI 668,965,471 0.86 20 589,396,276 0.80 23 OMNI 657,745,000 0.84 21 492,023,000 0.65 25 FBNB 546,303,475 0.70 22 565,410,593 0.75 24 BARO 388,220,366 0.50 23 292,630,204 0.39 28 ENER 376,654,568 0.48 24 364,103,215 0.49 27 HERI 326,798,447 0.42 25 FNBG 260,294,000 0.33 26 283,909,000 0.38 29 UNIB 5,743,190,540 7.75 3 BEIG 1,121,361,602 1.51 20 ROYA 1,107,979,672 1.49 21

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SOVE 370,329,000 0.50 26 TOTAL 78,144,370,193 74,503,602,431 Mean 3,010,000,000.00 3.85 2,570,000,000.00 3.46 Std. Dev. 3.27 2.81 Mann-Whitney test 0.512 0.266 Prob> |z| 0.6086 0.7905

First Bank Nigeria (FBN Bank) is the 22nd sized bank in the industry for the year 2017, with an asset size of 0.70% compared to 0.75%, the 24th position, in 2016. Bank of Baroda (BARO) improved its size to 0.50% ranking 23rd in 2017 compared to 0.39 and a placement of 28th in 2016. Energy (ENER) bank ranked 24th in 2017 with a size of 0.48%, this is from a 0.49% and a 27th position in 2016. Heritage (HERI) Bank ranked 25th by industry size in 2017. FNBG Bank Ghana limited (FNBG) ranked 26th in 2017 with a score of 0.33% compared to 0.38% in 2016 and the 29th position.

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. Table 5 presents a breakdown of each banks‟ mobilized deposit and also the weight of each banks‟ deposit to the industry deposit. Average deposit in 2017 was GHȼ 2,370,000,000.00 from the year 2016 value of GHȼ 2,040,000,000.00. From the Mann-Whitney test score for both years, we concluded there is no evidence for any difference in deposit mobilizing ability between locally owned banks and foreign owned banks.

Deposit mobilization is correlated to banks‟ retail presence as banks that had more branches recorded higher deposits. Total deposit mobilized for the 2017 and 2016 were GHȼ 61,724,103,301 and GHȼ 51,985,323,181 respectively.

GCB topped in 2017 with 13.49% of industry deposit compared to its third position in 2016 with an industry deposit score of 8.37%. ECOB, which held first position in 2016 with 10.07% of the industry‟s deposits, ranked second in 2017 with 11.60%. FIDE improved its deposit mobilization in 2017, making up 7.52% of industry deposit placing it third, an improvement on its sixth place finish in 2016 when it mobilised 6.04% of industry deposits. BBGL Bank maintained its fourth position for both years and marginally improved its industry deposit mobilization score of 7.26% in 2016 to 7.38% in 2017. Zenith (ZENI) Bank improved by moving up five places to the fifth position scoring 6.26% of industry deposit in 2017 in contrast to tenth position in 2016 with a registered score of 4.54%.

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Table 6. Industry Deposit Share 2017 2016 BANK Deposit GHȼ % of Dep RANK Deposit GHȼ % of Dep RANK GCB 8,326,376,000 13.49 1 4,939,259,000 8.37 3 ECOB 7,162,706,000 11.60 2 5,946,913,000 10.07 1 FIDE 4,640,268,000 7.52 3 3,567,840,000 6.04 6 BBGL 4,558,046,000 7.38 4 4,282,728,000 7.26 4 ZENI 3,861,183,115 6.26 5 2,682,415,918 4.54 10 STAN 3,535,783,000 5.73 6 4,091,536,000 6.93 5 SCB 3,486,793,000 5.65 7 3,207,375,000 5.43 8 CAL 3,360,017,000 5.44 8 2,885,201,000 4.89 9 ADB 2,999,561,000 4.86 9 2,528,475,000 4.28 11 ACCE 2,660,151,000 4.31 10 2,212,814,000 3.75 12 UBA 2,329,271,203 3.77 11 3,259,671,365 5.52 7 SG 2,098,079,862 3.40 12 1,993,964,356 3.38 13 UMB 1,948,855,000 3.16 13 1,406,009,000 2.38 16 REPU 1,727,365,000 2.80 14 1,600,055,000 2.71 14 PBL 1,471,462,000 2.38 15 1,435,386,000 2.43 15 GT 1,467,120,773 2.38 16 1,168,603,193 1.98 18 FABL 1,447,764,383 2.35 17 1,197,311,445 2.03 17 PREM 1,217,716,766 1.97 18 802,018,802 1.36 21 BOA 1,099,767,017 1.78 19 929,972,677 1.58 20 OMNI 546,976,000 0.89 20 368,561,950 0.62 25 BSCI 537,688,329 0.87 21 463,386,550 0.79 23 FBNB 408,824,016 0.66 22 436,610,403 0.74 24 ENER 301,969,818 0.49 23 283,863,365 0.48 26 BARO 216,803,307 0.35 24 148,700,157 0.25 28 HERI 191,508,712 0.31 25 FNBG 122,047,000 0.20 26 146,652,000 0.25 29 UNIB 5,256,543,254 8.91 2 BEIG 948,315,482 1.61 19 ROYA 595,461,866 1.01 22 SOVE 242,668,000 0.41 27 Total 61,724,103,301 51,985,323,181 Mean 2,370,000,000.00 3.85 2,040,000,000.00 3.45 Std. Dev. 3.40 2.86 Mann-Whitney test 0.512 0.177 Prob> |z| 0.6086 0.8594 Note: Dep, Deposit

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The bottom five banks are FBN Bank ranked 22nd with 0.66% of industry deposit in 2017 compared to 0.74% and a 24th ranking in 2016, although this bank recorded a decline in its deposit mobilization in 2017. ENER Bank improved its rankings and industry performance in 2017, recording 0.49% of industry deposit with a 23rd placement from a2016 industry score of 0.48% and 26thranking. BARO Bank contributed 0.35% of industry deposit, ranking 24th an improved position from the 28th position and industry score of 0.25% in 2016. HERI ranked 25th with a score of 0.31% in 2017. FNBG placed last, 26th, in 2017 with an industry score of 0.20% and also last, the 29th position, in 2016 with an industry deposit of 0.25%.

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. The mean loan granted in 2017 was GHȼ 911,000,000.00 undergoing a decline from the previous year, when the average industry loan was GHȼ 977,000,000.00. Similarly, the total industry loan of GHȼ 23,698,944,506 in 2017 was a decrease from the 2016 industry loan of GHȼ 28,347,456,524. There is no significant difference in loans granted by local banks compared to foreign bank as the Mann-Whitney test score is insignificant in both years.

ECOB, ranked first in both years with respect to loan generation, gave out 11.33% of industry loans in 2017, a dip from 12.28% in 2016. With 10.94% of loans given in 2017, BBGL Bank improved its ranking to second position from its previous year‟s ranking of third when it gave out 7.39% of the industry‟s loans. GCB also recorded an improvement, to fourth place, in 2017 when it made 8.86% of industry loans, an increase from its previous year‟s tally of 4.98% and seventh position. STAN bank ranked fourth in 2017 with a score of 7.91% in 2017 improving from sixth position in 2016 with a score of 5.92%. Cal bank (CAL) issued 7.82% of loans in 2017, ranking fifth, whereas in 2016 the bank had ranked fourth with 6.94% of loans given out.

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Table 7. Loans Created 2017 2016 Bank LoansGhȼ % of Loan Rank LoansGhȼ % of Loan Rank ECOB 2,685,759,000 11.33 1 3,480,471,000 12.28 1 BBGL 2,593,012,000 10.94 2 2,093,662,000 7.39 3 GCB 2,099,330,000 8.86 3 1,412,977,000 4.98 7 STAN 1,874,757,000 7.91 4 1,677,234,000 5.92 6 CAL 1,853,674,000 7.82 5 1,966,394,000 6.94 4 SG 1,409,551,517 5.95 6 942,307,572 3.32 14 SCB 1,385,696,000 5.85 7 1,262,636,000 4.45 10 ADB 1,139,356,000 4.81 8 1,005,302,000 3.55 13 UBA 1,098,846,411 4.64 9 1,845,645,572 6.51 5 UMB 1,081,744,000 4.56 10 1,040,944,000 3.67 11 FIDE 1,026,794,000 4.33 11 1,314,793,000 4.64 8 PBL 925,815,000 3.91 12 913,471,000 3.22 16 ACCE 877,675,000 3.70 13 1,285,612,000 4.54 9 REPUC 809,926,000 3.42 14 919,964,000 3.25 15 ZENI 804,676,754 3.40 15 1,012,054,694 3.57 12 BOA 495,750,311 2.09 16 447,086,581 1.58 20 GT 396,464,980 1.67 17 626,562,584 2.21 18 BSCI 276,779,461 1.17 18 258,013,151 0.91 21 FABL 249,797,797 1.05 19 233,156,314 0.82 22 OMNI 174,724,000 0.74 20 94,785,128 0.33 24 BARO 143,319,409 0.60 21 99,237,653 0.35 23 PREM 89,952,288 0.38 22 68,934,362 0.24 27 ENER 88,813,014 0.37 23 88,980,628 0.31 26 FBNB 66,706,038 0.28 24 93,149,172 0.33 25 FNBG 28,518,000 0.12 25 3,289,000 0.01 29 HERI 21,506,526 0.09 26 UNIB 2,885,538,777 10.18 2 ROYA 683,162,519 2.41 17 BEIG 579,853,817 2.05 19 SOVE 12,239,000 0.04 28 Total 23,698,944,506 28,347,456,524 Mean 911,000,000.00 3.85 977,000,000 3.45 Std. Dev. 3.36 3.09 Mann-Whitney test 0.243 0.177 Prob> |z| 0.8084 0.8594

Premium (PREM) Bank ranked 22nd with a score of 0.38% of industry loans in 2017, an improvement from the 27th position with a score of 0.24% in 2016. ENER Bank issued 0.37% of loans in 2017 and ranked 23rd, up from 0.31% of loans and 26th position in 2016. FBNB Bank

13 made 0.28% of loans in 2017 placing 24th compared to the 0.33% in 2016 ranking 25th. FNBG placed 25th with a score of 0.12% of industry loans in 2017, increasing its 0.01% loan issuance rate from the previous year when it ranked 29th. HERI Bank contributed to 0.09% of loans in the year 2016 ranking 26th.

2.5 Bank 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, would 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.

The industry recorded an average intermediation rate of 37.99% in 2017 from a 2016 mean of 45.68%. The year 2016 saw a higher level of volatility intermediation among the banks; this was 23.34% compared to 17.41% in 2017. We also observed that bank ownership, that is, whether a bank was local or foreign, did not influence their level of intermediation for the two years that we considered, this conclusion is based on the Mann-Whitney test score for the two respective years.

SG Bank created 67.18% of loans out of deposits, ranking first in 2017, a remarkable improvement from its 47.26% rate in 2016 and 16th position. BARO ranked second, registering 66.11% of loans out of deposits in 2017 against fourth position in2016 with a slightly higher intermediation percentage of 66.74%. Prudential (PBL) improved its intermediation from a fifth placement with 63.64% in 2016 to third position, making 62.92% of loans out of deposits. BBGL Bank improved remarkably from 14th position with a score of 48.87% in 2016 to fourth position with an intermediation score of 56.89% in 2017. Universal Merchant Bank (UMB) dipped in this metric in 2017, ranking fifth with a score of 55.51% compared to 74.04% and second position in 2016.

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Table 8.Bank Intermediation on the Market 2017 2016 Bank Intermediation Rank Intermediation Rank SG 67.18 1 47.26 16 BARO 66.11 2 66.74 4 PBL 62.92 3 63.64 5 BBGL 56.89 4 48.89 14 UMB 55.51 5 74.04 2 CAL 55.17 6 68.15 3 STAN 53.02 7 40.99 17 BSCI 51.48 8 55.68 11 UBA 47.18 9 56.62 10 REPU 46.89 10 57.50 9 BOA 45.08 11 48.08 15 SCB 39.74 12 39.37 19 ADB 37.98 13 39.76 18 ECOB 37.50 14 58.53 7 ACCE 32.99 15 58.10 8 OMNI 31.94 16 25.72 24 ENER 29.41 17 31.35 22 GT 27.02 18 53.62 13 GCB 25.21 19 28.61 23 FNBG 23.37 20 2.24 29 FIDE 22.13 21 36.85 21 ZENI 20.84 22 37.73 20 FABL 17.25 23 19.47 26 FBNB 16.32 24 21.34 25 HERI 11.23 25 PREM 7.39 26 8.60 27 ROYA 114.73 1 BEIG 61.15 6 UNIB 54.90 12 SOVE 5.04 28 Mean 37.9 9 45.68 Std. Dev. 17.41 23.34 Mann-Whitney test -0.674 0.443 Prob> |z| 0.5005 0.6579

The last five banks were: ZENI bank which ranked 22nd in 2017 with 20.84% intermediation and 20th in 2016 with a score of 37.72%; First Atlantic Bank Limited (FABL) at 23rd in 2017, making 17.25% of loans out of deposit, an improvement from the 26th position with an intermediation score of 19.47% in 2016; FBNB Bank improved its intermediation ranking by moving one place

15 up from 25th in 2016 with a score of 21.33 % to 24th in 2017 with a score of 16.32%; HERI Bank ranked 25th with a score of 11.23% of loans out of deposit mobilization in 2017; lastly, Premium (PREM) Bank ranked 26th in 2017 with a score of 7.39% from the 27th position with an intermediation score of 8.60% in 2016.

2.6 Personnel Resources

Source: quora.com

We capture personnel resources 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. The average personnel expense was GHȼ 96,700,000.00 in 2017 up from a 2016 figure of GHȼ 82,100,000.00. The total amount spent on personnel in the industry was GHS 2,513,743,223 in 2017 compared to GHȼ 2,380,404,970 in 2016. Based on the Mann-Whitney test score of 0.512 in 2017 and 0.133 in 2016, supported by the p-values, we conclude that there is no significant difference between local bank and foreign banks in relation to personnel resources.

Table 8 provides the details regarding personnel expense. GCB ranks first with respect to personal expense at the industry level, scoring14.43% of total industry personal expense in 2017 compared to 12.81% in 2016. ECOB ranked second in 2017 at 13.65%, a decline from its first position in 2016 with 13.27%. STAN Bank ranked third with a score of 12.52% in 2017, the same position but with score of 12.73% in 2016.BBLGBank ranked fourth in both years; however, the score in 2017 of 8.16% was higher than the 2016 score of 7.20%. Agricultural

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Development Bank (ADB) ranked fifth with a score of 6.65% compared to the sixth position in 2016 with a score of 5.71%. Table 9. Personnel Resources 2017 2016 BANK Labour GHȼ % of Indus Rank Labour GHȼ % of Indus Rank GCB 362,807,000 14.43 1 305,019,000 12.81 2 ECOB 343,108,000 13.65 2 315,993,000 13.27 1 STAN 314,622,000 12.52 3 303,012,000 12.73 3 BBGL 205,067,000 8.16 4 171,470,000 7.20 4 ADB 167,052,000 6.65 5 136,038,000 5.71 6 SCB 154,308,000 6.14 6 141,553,000 5.95 5 FIDE 114,502,000 4.56 7 105,823,000 4.45 7 SG 100,512,163 4.00 8 96,798,852 4.07 8 CAL 100,255,000 3.99 9 73,110,000 3.07 10 REPU 79,829,000 3.18 10 84,264,000 3.54 9 PBL 73,371,000 2.92 11 57,973,000 2.44 15 UMB 63,620,000 2.53 12 50,316,000 2.11 16 ZENI 63,497,940 2.53 13 61,270,606 2.57 13 ACCE 62,576,000 2.49 14 58,050,000 2.44 14 FABL 48,350,962 1.92 15 42,896,169 1.80 18 UBA 44,869,080 1.78 16 43,749,932 1.84 17 BOA 37,563,143 1.49 17 36,805,037 1.55 20 FNBG 35,405,000 1.41 18 25,652,000 1.08 22 GT 34,514,819 1.37 19 30,127,737 1.27 21 HERI 23,278,899 0.93 20 BSCI 21,430,177 0.85 21 20,279,609 0.85 23 FBNB 20,369,561 0.81 22 18,234,621 0.77 24 OMNI 18,754,000 0.75 23 12,328,651 0.52 25 PREM 13,146,376 0.52 24 4,102,560 0.17 28 ENER 8,948,403 0.36 25 7,542,876 0.32 27 BARO 1,985,700 0.08 26 1,460,170 0.06 29 BEIG 66,088,901 2.78 11 UNIB 63,037,357 2.65 12 ROYA 39,217,892 1.65 19 SOVE 8,191,000 0.34 26 Industry 2,513,743,223 2,380,404,970 Mean 96,700,000.00 3.85 82,100,000.00 3.45 Std. Dev. 4.11 3.73 Mann-Whitney test 0.512 0.133 Prob> |z| 0.6086 0.8943 Note: Indus, Industry

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FBNB Bank ranked 22nd with a score of 0.81% in 2017 compared to the 2016 score of 0.77% and 24th ranking. OMNI bank recorded 0.75% as industry expenses and ranked 23rd in 2017, an improvement of two places from its 25th position in 2016 with a score 0.52%. PREM Bank ranked 24th with a score of 0.52% in 2017, an improvement on its 28th position with a score of 0.17% in 2016. ENER Bank placed 25th in 2017 with a score of 0.36% in 2017; in 2016 it ranked 27th with a 0.32% score. BARO ranked 26th with a score of 0.08% in 2017 and a score of 0.06% in 2016 with a placement of 29th.

2.7 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 average industry personnel expense to total assets was 3.43% in 2017 as against 3.14% in 2016. There was more variability in personnel expense to total assets in 2017 with a standard deviation of 2.53 from 1.79 variability in the 2016. There was no significant difference between local and foreign banks personnel to total assets measure using the Mann-Whitney test during each of the two years.

FNBG ranked first in 2017 and 2016, constituting 13.60% and 9.40% of total assets to personnel resources. HERI Bank ranked second in 2017 with a score of 7.12% of total asset committed to personnel expenses. STAN Bank‟s personnel expense amount to 5.98% of total assets placing third in 2017 and5.60% in 2016 in the same position. ADB committed 4.71% of total assets to employees, ranking of fourth in 2017 and sixth in 2016 with a score of 4.48%. REPU Bank ranked fifth in both years with a score of 3.84% in 2017 and 4.54% in 2016.

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Table 10. Personnel Expense to Total Assets 2017 2016 BANK Personnel to Assets% Rank Personnel to Assets% Rank FNBG 13.60 1 9.04 1 HERIT 7.12 2 STAN 5.98 3 5.60 3 ADB 4.71 4 4.48 6 REPU 3.84 5 4.54 5 GCB 3.80 6 5.04 4 ECOB 3.77 7 3.94 8 FBNB 3.73 8 3.23 14 SG 3.60 9 3.95 7 BBGL 3.44 10 3.24 12 PBL 3.36 11 3.55 9 SCB 3.23 12 3.24 13 BSCI 3.20 13 3.44 11 OMNI 2.85 14 2.51 18 FABL 2.84 15 2.97 16 BOA 2.80 16 3.22 15 CAL 2.38 17 2.03 22 ENER 2.38 18 2.07 21 UMB 2.13 19 1.80 24 FIDE 2.13 20 2.54 17 ACCE 1.96 21 2.17 20 GT 1.84 22 1.95 23 UBA 1.51 23 1.17 26 ZENI 1.36 24 1.80 25 PREM 0.98 25 0.44 29 BARO 0.51 26 0.50 28 BEIG 5.89 2 ROYA 3.54 10 SOVE 2.21 19 UNIB 1.10 27 Mean 3.43 3.14 Std. Dev. 2.53 1.79 Mann-Whitney test 0.189 -0.310 Prob> |z| 0.8504 0.7566

The banks with poorest personnel to assets ratio were: Guaranty Trust (GT) Bank, which committed 1.84% of total assets to employees in 2017, ranking 22nd compared to 1.95% in 2016

19 in 23rd position; United Bank for Africa (UBA) with 1.51% of total assets available to employees in 2017, ranking 23rd, an improvement on its 26th position with a score of 1.17% in 2016; ZENI bank contributed 1.36% of total assets to employee emolument in 2017 ranking 24th as against 1.80% with a placement of 25 in the year 2016. PREM Bank contributed 0.98% of total assets to employees in 2017 placing 25th as against 0.44% and a position of 29th in 2016; lastly, BARO allotted 0.51% of total assets to employees emoluments ranking 26th in 2017 compared to 0.50% and the 28th position in 2016.

2.8.0 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 may prefer to pursue riskless investment on the market to protect depositors‟ funds, a strategy that hurts business loan requests.

Interest income for banks in the year 2016 came mainly from loan interest which amounted to 58% of the industry‟s interest income, while non-loan interest income accounted for 42% as displayed in Figure 7.

Figure 4. Bank Interest Income 2016

A 2016 change in banks‟ interest income strategy led to a reduction in loan-interest income to 32% in 2017, while non-loan interest income rose to 68%. As Figure 8 shows, in 2017 banks chose to invest in interest earning assets rather than grant loans, an indication of a shift in income strategy which, if it continues, would be disadvantageous to businesses sourcing for loan funds.

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Figure 5. Bank Interest Income 2017

2.8.1 Loan Interest-Income 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. From the industry level there was a total loan interest income of GHȼ 4,709,290,514 in 2017, a decline from the 2016 value of GHȼ6,176,143,207, a result partly due to the non-availability of data on the five defunct banks. The average loan interest income in 2017 was GHȼ 181,000,000 compared to the GHȼ213,000,000 recorded in the year 2017. The Mann-Whitney test score of 0.081 in 2017 and 0.266 in 2016 show that there is significant difference in loan interest income between local and foreign bank in both years.

In 2017 ECOB ranked first, recording GHȼ 560,267,000 as loan interest income, a decrease from the 2016 amount of GHȼ 598,245,000 which placed the bank in second position. GCB placed second in 2017, registering a loan interest income of GHȼ 4,855,785,728; this was an improvement from fourth place in 2016 with loan interest income of GHȼ 406,773,000. CAL Bank maintained the third spot for both years, recording GHȼ 454,839,000 in 2017 and GHȼ 442,036,000 loan interest income in 2016. In 2017, BBGL Bank ranked fourth with GHȼ 374,623,760loan interest income, an increase from its 2016 loan interest income of GHȼ 339,702,976 and fifth position. UBA moved one place to up to fifth position in 2017 registering GHȼ346,853,296 compared to the GHȼ 331,920,489 loan interest income in the year 2016.

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Table 11. Loan Interest Income 2017 2016 BANK Interest on Loans GHȼ Rank Interest on Loans GHȼ Rank ECOB 560,267,000 1 598,245,000 2 GCB 455,785,728 2 406,773,000 4 CAL 454,839,000 3 442,036,000 3 BBGL 374,623,760 4 339,702,976 5 UBA 346,853,296 5 331,920,489 6 STAN 336,139,000 6 310,898,000 7 ACCE 272,645,000 7 306,983,000 8 SG 251,319,703 8 225,110,831 12 SCB 217,939,000 9 232,568,000 10 ADB 197,666,000 10 197,209,000 14 UMB 189,577,000 11 164,501,000 17 REP 179,157,000 12 202,022,000 13 ZENI 177,185,265 13 193,589,642 15 PBL 171,314,000 14 183,571,000 16 FIDE 152,696,000 15 262,392,000 9 GT BA 96,294,921 16 125,258,630 18 BSCI 53,945,844 17 58,713,095 20 BOA 51,980,765 18 56,897,432 21 OMIN 48,771,000 19 30,419,651 22 FABL 43,699,738 20 69,730,804 19 ENER 27,063,941 21 21,167,509 23 PREM 19,983,676 22 14,593,759 25 BARO 13,132,640 23 10,529,186 26 HERI 9,950,318 24 FBNB 5,880,919 25 5,086,734 27 FNBG 580,000 26 664,000 29 UNIB 1,131,457,776 1 ROYA 232,197,928 11 BEIG 21,098,765 24 SOVE 806,000 28 Industry 4,709,290,514 6,176,143,207 Mean 181,000,000 213,000,000 Mann-Whitney test 0.081 0.266 Prob> |z| 0.9356 0.7905

The last five banks are premium bank recording GHȼ 181,000,000 in 2017 at 22nd as against the GHȼ 14,593,759 in 2016 at 25th position. BARO placed 23rd with a loan interest income of GHȼ 13,132,640 ranking 23rd, an improvement from the 26th position loan interest income value of GHȼ 10,529,186 in 2016. HERI Bank placed 24th registering GHȼ 9,956,318 in 2017. FBNB

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Bank ranked 25th with loan interest income of GHȼ 5,880,919 in 2017 from the 27th position in 2016 with a loan interest income of GHȼ5,086,734. FNBG placed 26th in 2017 with an amount of GHȼ 580,000 as loan interest compared to the GHȼ 664,000 and the 29th position in 2016.

2.8.2 Fee and Commission.

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. The average fee and commission income in the year 2017 was GHS 57, 762,622.00, as against year 2016 when fee and commission income was GHS 46,904,830.86. There are no noticeable differences between local and foreign banks‟ fees and commission income for both years.

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Table 12. Fee and Commission Income BANK Fee & Comm GHȼ % of Inds Rank Fee & Comm GHȼ % of Inds Rank GCB 207,787,000 13.84 1 174,585,000 12.83 1 ECOB 202,070,000 13.45 2 160,503,000 11.80 2 STAN 170,698,000 11.37 3 127,880,000 9.40 3 BBGL 130,248,000 8.67 4 112,785,000 8.29 4 FIDE 97,487,000 6.49 5 76,985,000 5.66 6 SCB 97,136,000 6.47 6 91,161,000 6.70 5 SG 75,948,755 5.06 7 71,765,799 5.28 7 ZENI 73,346,499 4.88 8 63,674,640 4.68 10 ADB 72,947,000 4.86 9 64,391,000 4.73 9 CAL 63,818,000 4.25 10 64,546,000 4.75 8 GT 47,932,902 3.19 11 44,920,496 3.30 11 UBA 45,978,504 3.06 12 31,779,956 2.34 16 UMB 44,740,000 2.98 13 31,203,000 2.29 17 PBL 36,802,000 2.45 14 33,952,000 2.49 15 FABL 33,561,440 2.23 15 43,369,996 3.12 12 REPU 24,307,000 1.62 16 20,096,000 1.48 19 BOA 22,308,919 1.49 17 22,443,084 1.65 18 ACCE 18,080,000 1.20 18 36,021,000 2.65 14 BSCI 14,421,479 0.96 19 10,140,185 0.75 21 FBNB 7,656,488 0.51 20 7,748,978 0.57 22 ENER 6,647,395 0.44 21 5,077,399 0.37 24 OMNI 4,402,000 0.29 22 3,298,485 0.243 25 FNBG 1,839,000 0.12 23 289,000 0.02 29 HERI 716,824 0.05 24 PREM 555,579 0.04 25 376,890 0.03 28 BARO 392,388 0.03 26 458,688 0.03 27 UNIB 40,284,666 2.96 13 ROYA 13,437,734 0.99 20 BEIG 5,532,099 0.41 23 SOVE 1,534,000 0.11 26 Industry 1,501,828,172 100.00 1,360,240,095 100.00 Mean 57,762,622 46,904,830.86 Mann-Whitney test -0.081 -0.487 Prob> |z| 0.9356 0.6262 Note: Inds, industry, Comm Commission

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3.0 PROFITABILITY

Source: study-aids.co.uk.

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. At the industry level the mean return on asset was 1.73% in 2017; this is an increase from the 2016 average return on asset of 1.50%. There was a higher variability in return on asset of 4.03 in 2017 compared to the 3.07 total variability in 2016. The test for differences in return on asset between locally and foreign owned banks shows some difference in their return on assets for the year 2017 with a Mann-Whitney test score of -2.510 as opposed to-2.745 for the year 2016.

We measure return on asset which is the percentage of return earned on assets made available to the management of the banks by owners of the banks. The higher this performance indicator the better it is for the bank. Leading the top five banks by way of return on assets was UBA, in 2017, at 7.40% improving drastically from 3.85% in 2016.SG, similarly, bettered its 2016 eleventh place ranking with 2.42%to second in 2017 with a score of 7.19%. Coming third in 2017, BARC Bank with 6.91% slipped from its second place ranking in 2016 with the lower score of 5.94%. Baroda dropped from first place in 2016 with 5.94% to fourth place with 6.60% in 2017. Rounding up the top five banks with a score of 5.93% in 2017 was SCB which also dropped from its 2016 third place ranking while scoring 5.13%.

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Table 13. Return on Asset BANK 2017 Rank 2016 Rank UBA 7.40 1 3.85 9 SG 7.19 2 2.42 11 BBGL 6.91 3 5.94 2 BARO 6.60 4 7.87 1 SCB 5.93 5 5.13 3 GT BA 4.71 6 4.77 4 STAN 4.10 7 2.80 10 ZENI 3.69 8 4.12 7 CAL 3.43 9 1.39 14 ECOB 2.81 10 4.06 8 FBNB 2.09 11 0.57 20 GCB 2.08 12 4.73 5 BOA 1.81 13 2.22 12 FIDE 1.79 14 0.79 17 REPU 1.78 15 (2.08) 25 UMB 1.60 16 0.73 18 FABL 1.35 17 1.16 15 ACCE 1.26 18 1.61 13 BSCI 1.14 19 4.43 6 BEIG 0.69 20 0.97 16 ADB 0.68 21 (2.71) 27 ENER 0.22 22 0.17 23 PREM (0.89) 23 0.23 22 PBL (1.23) 24 0.53 21 OMIN (2.24) 25 -5.83113 29 HERI (8.45) 26 FNBG (9.63) 27 (1.50) 24 UNIB 0.73 19 SOVE (2.21) 26 ROYA (3.49) 28 Mean 1.73 1.50 Std. Dev. 4.03 3.07 Mann-Whitney test -2.510 -2.745 Prob> |z| 0.0121 0.0060

The worst five performers in 2017 were PREM Bank, ranked 24th with a score of -1.23% in 2017 from the 21st position with a score of 0.53% in 2016. PBL Bank placed 24th, recording -1.23% in 2017 a worse performance than in 2016 when it scored-0.53% with a ranking of 21st. OMNI Bank followed, ranking 25th and registering -2.24% in 2017; in 2016, the bank ranked 29th,

26 posting -5.83%. HERI Bank ranked 26th with a score of -8.45% followed by FNBG at 27th, recording 9.63% in 2017 from a 2016 placement of 24th with a score of -1.50%.

3.1 Risk Adjusted Return on Assets We attempt to capture the exposure embedded in banks‟ attempts to generate return using the risk adjusted return on asset (RAROA). 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 asset over the past three years. Banks that had not been operational from the year 2015, 2016 and 2017 were not assessed. The industry level average RAROA is 3.95% in 2017, this is a marginal increase from the 2016 measure of 3.79%. Total risk is 6.70% for 2017 also a marginal increase from the 2016 measure of 6.61%. The Mann-Whitney test score of -2.237% in 2017 and -2.234% in 2016 shows that there is a significant difference in RAROA for local banks compared to foreign owned banks.

GT Bank, FABL, BARO, ZENI and BOA, ranked first, second, third, fourth and fifth with RAROA of 31.42%, 14.08%,9.61%, 8.57% and 6.98% respectively in year 2017. These banks maintained the same positions from the year 2016, recording RAROA of 31.85%, 12.16%, 11.46%, 9.56% and 8.57% respectively.

Table 14. Risk Adjusted Return on Asset BANK 2017 Rank 2016 Rank GT BA 31.42 1 31.85 1 FABL 14.08 2 12.16 2 BARO 9.61 3 11.46 3 ZENI 8.57 4 9.56 4 BOA 6.98 5 8.57 5 BBGL 6.40 6 5.51 6 STAN 4.46 7 3.05 10 BEIG 3.52 8 4.94 7 UBA 2.97 9 1.54 14 SCB 2.83 10 2.44 13 ECOB 2.58 11 3.73 8 SG 2.56 12 0.86 17 CAL 2.01 13 0.82 18 ENER 1.61 14 1.20 16 UMB 1.59 15 0.73 19 GCB 1.24 16 2.81 11 FIDE 1.22 17 0.54 20 FBNB 1.20 18 0.32 22 ACCE 1.14 19 1.46 15 REPU 0.75 20 (0.88) 26 BSCI 0.69 21 2.68 12

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ADB 0.05 22 (0.21) 24 OMIN (0.59) 23 (1.53) 28 PBL (0.61) 24 0.26 23 PREM (1.46) 25 0.38 21 FNBG (2.25) 26 (0.35) 25 UNIB 3.60 9 ROYA (1.28) 27 Mean 3.95 3.79 Std. Dev. 6.70 6.61 Mann-Whitney test -2.237 -2.234 Prob> |z| 0.0253 0.0255

Among the worst performers, ADB ranked 22nd scoring 0.05% in 2017, an improvement from its 24th position score of -0.21% in 2016. OMNI Bank improved its ranking to 23rd in 2017 from 28th the previous year, recording -0.59% in the former and -1.53% in 2016. PBL took the 24th position registering -0.61%, down from 23rd position with a score of 0.26% in 2016. PREM Bank ranked 25th with a score of -1.46% in 2017 as against the 21st position with a score of 0.38% in 2016. The FNBG placed 26th with a -2.25% score in 2017, a slip from the 25th place in 2016 with a score of 0.35%.

3.2 Return on Equity Return on Equity (ROE) measures additions in the earnings to contributions of fund by owners of the bank. The higher this performance indicator the better it is for the bank. Average ROE for the industry was 8.50% in 2017, a decline in performance compared to the 12.30% industry ROE in 2016. There was less variability in 2016 with a standard deviation in ROE of 17.51% compared to the 2017 variability of 21.39%. We also report a significant difference in the ROE of local banks and foreign banks in the Mann-Whitney score of -2.125 in 2017 and -2.109 in 2016.

UBA, which was first in both years, registered 39.96% in 2017 and 43.73% in 2016. BBGL Bank followed in second place with 39.08% in 2017 a marginal dip in performance compared to the same position and a score of 39.67% in 2016. SG placed third with 38.66% in 2017, an improvement from tenth position with 17.85% in 2016. SCB ranked fourth in both 2017 and 2016 with a score of 30.80% and 29.34% respectively. The GT Bank placed fifth in 2017 with a score of 26.30% and marginal improvement from the 6th position in 2016‟s score of 26.05%.

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Table 15. Return on Equity BANK 2017 Rank 2016 Rank UBA 39.96 1 43.73 1 BBGL 39.08 2 39.67 2 SG 38.66 3 17.85 10 SCB 30.80 4 29.34 4 GT BA 26.30 5 26.05 6 ECOB 24.87 6 34.19 3 STAN 23.52 7 21.72 9 ZENI 23.09 8 24.40 7 UMB 22.44 9 12.42 12 CAL 22.34 10 9.96 13 FIDE 18.03 11 6.70 17 GCB 17.85 12 28.17 5 REPU 16.32 13 (27.35) 28 BARO 15.34 14 16.29 11 BOA 12.88 15 4.19 20 FABL 9.97 16 8.10 16 FBNB 9.21 17 2.84 21 ACCE 6.31 18 9.79 14 BSCI 6.10 19 22.18 8 ADB 5.06 20 (17.78) 26 BEIG 3.38 21 6.64 18 ENER 1.18 22 0.86 23 PREM (10.02) 23 1.76 22 PBL (11.14) 24 5.65 19 OMIN (14.31) 25 (24.36) 27 FNBG (18.30) 26 (3.14) 24 HERI (26.77) 27 UNIB 8.79 15 SOVE (3.29) 25 ROYA (58.74) 29 Mean 8.50 12.30 Std. Dev. 21.39 17.51 Mann-Whitney test -2.125 -2.109 Prob> |z| 0.0335 0.0350

The last five performers were PREM Bank, 23rd in 2017 with a score of -10.02% down from 22nd place with a score of 1.76% in 2016. PBL dipped in its performance in 2017, placing 24th with a score of -11.14% compared its ranking 19th with a score of 5.65% in 2016. OMNI Bank continued to improve its performance albeit at a slow rate. This bank place 25th with -14.31% in 2017 compared to 27th with 24.36% in 2016. FNBG declined in this performance metric in 2017,

29 ranking 26th while registering a score of -18.30% compared to the 24th position with a score of -3.14% in 2016. The new entrant HERI Bank ranked 25th with a score of -26.77% in the year 2017.

3.3 Risk Adjusted Return on Equity The risk adjusted return on equity (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. The risk here is from the standard deviation of return on equity over the past three years. Banks that had not been operational from the year 2015, 2016 and 2017 were not assessed. The industry level average RAROE was11.76% in 2017; this is a marginal increase from the 2016 measure of 10.87%. Total risk in 2017 was 40.63% for 2017, a marginal increase from the 2016 measure of 38.86%. The Mann-Whitney test score of -2.345% in 2017 and -2.281% in 2016 shows that there is a significant difference in RAROA for local banks compared to foreign owned banks.

On the risk return basis, GT Bank, BARO, and STAN Bank ranked first, second and third respectively in 2017 and 2016. These banks also had RAROE scores of 208.46%, 27.62%, and 183.53% in 2017 compared to 206.46%, 29.33% and 17.11% in year 2016 respectively. FABL ranked fourth in 2017 with score of 10.16% an overall improvement from 8.26% for the fifth position in 2016. ZENI Bank ranked fifth in 2017 position registering 8.39% compared to a marginally better fourth place performance in 2016 with a score of 8.87%.

Table 16. Risk Adjusted Return on Equity BANK 2017 Rank 2016 Rank GT BA 208.46 1 206.46 1 BARO 27.62 2 29.33 2 STAN 18.53 3 17.11 3 FABL 10.16 4 8.26 5 ZENI 8.39 5 8.87 4 BBGL 6.79 6 6.89 6 ECOB 3.88 7 5.33 7 UBA 3.74 8 4.10 9 SG 3.14 9 1.45 14 SCB 2.93 10 2.79 12 GCB 2.79 11 4.40 8 CAL 2.05 12 0.92 18 ENER 1.76 13 1.28 15 BOA 1.74 14 0.57 19 UMB 1.68 15 0.93 17 FIDE 1.54 16 0.57 19 BEIG 1.46 17 2.88 11 FBNB 1.35 18 0.42 20

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BSCI 0.75 19 2.71 13 ACCE 0.75 19 1.16 16 REPU 0.69 20 (1.15) 25 ADB 0.44 21 (1.54) 27 PBL (0.58) 22 0.30 21

OMNI (0.66) 23 (1.12) 24

PREM (1.47) 24 0.26 22 FNBG (2.12) 25 (0.36) 23 UNIB 2.98 10 ROYA (1.34) 26 Mean 11.76 10.87 Std. Dev. 40.63 38.86 Mann-Whitney test -2.345 -2.281 Prob> |z| 0.0191 0.0225

ADB ranked 21st with a score of 0.44%, an improvement from 27th place and a score of -1.54% in 2016. PBL was ranked 22nd with a score of -0.58% as against a 0.30% score in 2016 placing 21st. With a score of -0.66% OMNI Bank was 23rd in 2017, a marginal improvement from its24th position, -1.12% score in 2016. PREM Bank‟s performance dipped in 2017, placing 24th with a score of -1.47% from a 22nd placement in 2016 with a score of 0.26%. FNBG placed bottom at the 25th position in 2017 scoring -2.12% compared to the 23rd position score of -0.36 in 2016.

3.4 Asset Productivity 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 more risky. This performance indicator is also higher if the bank generates a greater proportion of revenues from activities that do not contribute to earnings asset such as transaction services and asset management. On the industry level the average asset productivity was 19.45% in 2017 compared to 19.22% in 2016. The variability in this performance indicator was higher in 2017 at 7.49% from the 5.73% in 2016. There was significant difference in asset productivity for local banks and foreign bank with a Mann-Whitney test score of 2.834 in 2016 as against the insignificant difference test score of 1.205 in 2017

The defunct Beige Bank, with a score of 49.68%, ranked first in 2017, and ranked third in 2016 with a score of 31.46%. BOA greatly improved on its asset productivity, generating more earnings from its assets and coming in at second place with 30.29% compared to 9.05% and 29th position in 2016. SCB had a relatively stable asset productivity, ranking third in 2017 with 26.90% compared to the fourth position in 2016 with a score of 26.81%. OMNI Bank placed fourth in 2017 registering a 24.85% score, an improvement from its eighth position in 2016 with a score of 21.51%. PREM Bank improved its performance by placing fifth and seventh with scores of 23.22% and 21.57% for the years 2017 and 2016 respectively.

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Table 17.Asset Productivity BANK 2017 Rank 2016 Rank BEIG 49.68 1 31.46 3 BOA 30.29 2 9.05 29 SCB 26.90 3 26.81 4 OMIN 24.85 4 21.51 8 PREM 23.22 5 21.57 7 UBA 23.20 6 18.90 12 ENER 21.09 7 16.10 21 ADB 19.09 8 16.15 20 CAL 19.06 9 19.48 10 BSCI 19.03 10 21.47 9 PBL 18.68 11 18.72 13 SG 18.67 12 17.37 18 UMB 18.62 13 13.24 27 GT BA 18.15 14 19.10 11 REPU 17.89 15 18.45 16 FBNB 17.53 16 15.22 22 GCB 17.45 17 21.62 6 STAN 16.05 18 14.20 25 ZENI 15.40 19 16.77 19 FABL 15.24 20 17.59 17 FIDE 15.15 21 18.66 14 ACCE 14.94 22 18.59 15 BBGL 13.92 23 13.18 28 ECOB 13.90 24 14.76 23 FNBG 13.34 25 14.52 24 BARO 12.27 26 13.32 26 HERI 11.46 27 ROYA 31.84 1 SOVE 31.84 1 UNIB 26.00 5 Mean 19.45 19.22 Std. Dev. 7.49 5.73 Mann-Whitney test 1.205 2.834 Prob> |z| 0.2282 0.0046

At the bottom of the table, BBGL Bank placed 23rd with 13.92%, improving on its 2016 performance when it ranked 28th at 13.18%. ECOB‟s performance dipped marginally, scoring 13.90% at 24th in 2017 from 23rd place with a score of 14.76% in 2016. FNBG bank slipped to the 25th position in 2017 with a score of 13.34%, a lower score compared to the 14.52% with a position of 24th in 2016. The 26th place bank, BARO did not change positions but experienced a

32 decline in percentage score of 12.27% in 2017 from 13.32% in 2016. The HERI Bank ranked 27th with a score of 11.46%.

3.5 Asset Efficiency

We estimate asset efficiency of bank 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 would fall and negatively impact on that bank‟s risk adjusted return on capital. The average asset efficiency was 90.66% with a volatility of 5.32% in 2017, an increase from the 2016 average of 92.72% with a corresponding volatility of 3.04%. We do not find any significant difference in asset efficiency between local banks and foreign banks for both years as the Mann- Whitney test score of -0.803 and -1.018 portrays.

Baroda Bank topped this performance metric in 2017 and 2016 recording 99.49% and 99.43% respectively. UBA followed suit in both years, registering 97.70% in 2017 and 97.96% in 2016. Barclays ranked third in 2017 with a score of 96.52% and fourth with a score of 96.40% in 2016. GT bank slipped by one place to fourth position in 2017 with a score of 96.21%; its 2016 score was 96.59%. Remaining in fifth position for both years, FNBG scored 95.86% in 2017 and 96.05% in 2016.

Table 18. Asset Efficiency BANK 2017 Rank 2016 Rank BARO 99.49 1 99.43 1 UBA 97.70 2 97.96 2 BBGL 96.52 3 96.40 4 GT BA 96.21 4 96.59 3 FBNB 95.86 5 96.05 5 PREM 95.29 6 94.84 7 FIDE 95.11 7 94.27 9 REPU 94.03 8 93.00 14 ADB 92.59 9 92.13 18 UMB 92.58 10 92.56 17 ZENI 92.02 11 93.82 12 SCB 91.67 12 93.01 13 CAL 91.33 13 88.84 26 ACCE 90.37 14 90.94 21 FABL 90.31 15 89.60 24 PBL 89.63 16 92.62 16 ECOB 89.59 17 90.70 22 BSCI 89.51 18 91.04 20 STAN 89.10 19 94.51 8

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OMIN 89.01 20 88.07 27 SG 88.81 21 95.09 6 BOA 88.72 22 87.70 29 GCB 86.50 23 93.99 11 FNBG 86.38 24 90.15 23 BEIG 85.15 25 88.06 28 ENER 78.49 26 88.97 25 HERI 75.77 27 SOVE 94.07 10 UNIB 92.96 15 ROYA 91.52 19 Mean 90.66 92.72 Std. Dev. 5.32 3.04 Mann-Whitney test -0.803 -1.018 Prob> |z| 0.4218 0.3085

The last five banks were: GCB which placed 23rd with 86.50% in 2017 falling drastically from 11th position in 2016 with a score of 93.99%. FNBG slipped one position to 24th, registering 86.38% compared to the 23rd position in 2016 with a high score of 90.15%. BEIG Bank rose three places to 25th with a score of 85.15% in 2017 compared to its 2016 placement at 28th with albeit a higher score of 88.06%. ENER Bank also dipped one place down to 26th compared to the 25th position with a score of 78.49% and 88.97% in 2017 and 2016 respectively. The HERI Bank ranked 27th with a score of 75.77% for the year 2017.

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4.0 BANK EFFICIENCY

Source: Ron Buck

4.1 Bank model 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 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 saving 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

35 commission income. The three price inputs are price of labour, price of noncurrent assets and price of deposits. The prices of outputs are price of loans, price of investment and price of fee and commission income. We also use 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.

4.2 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 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.

The technical efficiency score for banks was on the average 73% in both 2017 and 2016. There was more variability in technical efficiency of 0.37 in 2017 compared to the 0.35 in 2016. The Mann-Whitney test scores of 1.538 in 2017 and 0.811 in 2016reveals an insignificant difference in technical efficiency between local and foreign owned banks.

Our results show 16 banks were managerially efficient in 2017; these were: Barclays, Baroda, FBNB Bank, ECO Bank, Fidelity, FNBG, UMB, Premium, CAL Bank, SG, UBA, STAN, BOA, PBL, HERI, scoring a100 points each. These banks, though varying in size, adopted the right production systems that gave maximum output. STAN, FBNB Bank, BOA and PBL improved their managerial ability from efficiency levels of 53.72%, 55.09%, 60.38% and 90.31% in 2016 respectively. SCB maintain its 17th position for both years; however its managerial efficiency declined from 85.23% in 2016 to 59.43% in 2017. Omni Bank improved its managerial efficiency from the 28th position with a score of 49.5% to the 18th position in 2017 with a score of 58.61%. ADB dipped in performance; this bank had an efficiency score of 81.99% from the 18th position in 2016 to a 19th position with a low score of 54.44% in the year 2017. Zenith Bank recorded the worst technical efficiency score of 46.42% in 2017 from a 100% managerial efficiency level in 2016.

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Table 19. Technical Efficiency Score BANK 2017 Rank 2016 Rank BBLG 100 1 100 1 BARO 100 1 100 1 GCB 100 1 100 1 ECOB 100 1 100 1 FIDE 100 1 100 1 FNBG 100 1 100 1 UMB 100 1 100 1 PREM 100 1 100 1 CAL 100 1 100 1 SG 100 1 100 1 UBA 100 1 100 1 STAN 100 1 53.72 21 FBNB 100 1 55.09 22 BOA 100 1 60.38 20 PBL 100 1 90.31 16 HERI 100 1 SCB 59.43 17 85.23 17 OMIN 58.61 18 49.5 28 ADB 54.44 19 81.99 18 ZENI 46.42 20 100 1 BSCI 33.3 21 11.58 31 ACCE 24.82 22 61.5 19 FABL 18.98 23 100 1 ENER 11.95 24 19.9 32 REPU 2.41 25 2.75 33 GT 0.42 26 0.65 34 ROYA 100 1 UNIB 100 1 BEIG 45 29 SOVE 12.51 30 Mean 73% 73% Std. Dev. 37% 37% Mann-Whitney test 1.538 0.811 Prob> |z| 0.1240 0.4175

The last five ranked banks are: Access (ACCE) Bank, recording 24.82% with a ranking of 22nd in 2017 saw a dip in managerial efficiency from its 2016 score of 61.5% and 19th position. FABL experienced a sharp decline in its technical efficiency, dropping from 100% in 2016 to 18.98% in 2017 with a placement of 23. ENER Bank‟s production efficiency declined in 2017; the bank recorded a score of 11.95% with a 24thplace position, down from 19.9% production efficiency

37 and a 32nd position in 2016. Republic Bank (REPU) Bank recorded 2.41% production efficiency in 2017 ranking 25th from 2.75% efficiency level in 2016 with a position of 33. GT Bank‟s managerial efficiency was at 0.42% in 2017 ranking26th, compared to 0.65% in 2016 and 34th place.

The recommendations for the last five banks, holding the assumption that their current production technology would not change, is that: ACCE Bank must create more loans and undertake some more non - loan interest income; FABL must prioritize investment in non- loan interest income activities, over loan income; ENER bank must create more loans, than non-loan interest income activities; REPU bank must have a fair balance in increasing loans and the pursuit of non-loan interest income; and GT bank must consider non-loan interest income more than loan income.

4.3 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 noncurrent assets and price of deposit. Banks that acquire these inputs at cheaper prices are preferred and are most likely to report higher cost efficiency score than others. On the industry level there was an average cost efficiency level of 63% in 2017 and improvement from the 2016 level of 55%. The variability in cost efficiency for both years was 0.28%. The Mann-Whitney test score of -2.691 in 2016 shows there was significant difference in cost efficiency between local and foreign banks; this was not the case for the year 2017 with a test score of -0.514.

For both years, our results show that four banks namely GCB, BBGL, BARO and ECOB were the most cost efficient banks in Ghana recording cost efficient score of 100%; these banks generated their outputs using cheap inputs prices. BOA improved its cost efficiency level to 100% in 2017 from a 68.89% in 2016 at 9th position. STAN bank ranked 6 and 7th with efficiency score of 98.02% and 97.01% for the years 2017 and 2016 respectively. HERI Bank came 7th in 2017 posting an 87.37% cost efficiency level. SCB had a slump in its cost efficiency, recording an 85.39% cost efficiency level in 2017 compared to the 100% score recorded for 2016. The bank struggled to manage its input costs in the year 2017 compared to 2016. GT Bank improved its cost efficiency from 45.86% and14th position in 2016 to 75.72% and ninth position in 2017.

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Table 20. Cost Efficiency Score BANK 2017 Rank 2016 Rank GCB 100 1 100 1 BBLG 100 1 100 1 BARO 100 1 100 1 ECOB 100 1 100 1 BOA 100 1 68.69 9 STAN 98.02 6 97.01 7 HERI 87.37 7 SCB 85.39 8 100 1 GT 75.72 9 45.86 14 FIDE 74.95 10 48.04 12 SG 74.16 11 70.48 8 FBNB 69.17 12 42.11 17 FNBG 63.95 13 100 1 UBA 61.54 14 49.18 11 PREM 52.7 15 39.55 19 CAL 49.19 16 46.59 13 ADB 42.99 17 38.31 22 ACCE 42.58 18 38.77 20 OMNI 38.54 19 18.91 28 ZENI 34.76 20 42.19 16 PRUD 34.69 21 43.73 15 REPU 33.57 22 36.97 23 UMB 32.96 23 38.41 21 BSCI 32.11 24 29.63 24 ENER 25.86 25 39.67 18 FABL 17.14 26 51.55 10 SOVE 28.25 25 UNIB 26.1 26 ROYA 22.6 27 BEIG 18.29 29 Mean 63 55 Std. Dev. 28 28 Mann-Whitney test -0.514 -2.691 Prob> |z| 0.6074 0.0071

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REPU Bank struggled to manage its input prices and declined in its cost efficiency in 2017, recording a score of 33.57%, earning 22nd place compared to 36.97% with a ranking of 23rd in 2016. UMB cost efficiency level also declined in 2017; the bank recorded 32.96% ranking 23rd in 2017 from a 38.41% and a placement of 21st in 2016. BSCI scored 32.11% and 24th in 2017 in 2017 and improvement over the 2016 score of 29.63% with a position of 24. ENER Bank scored 25.86% ranked 25th in 2017, as against the 39.67% cost efficiency score with 18th position in 2016. FABL recorded a cost efficiency level of 17.14% ranking 26thin 2017 compared to the 10th position with a score of 51.55% in 2016.

The managers of REPU, UMB, BSCI, ENER and FABL should focus on strategies that would lead to an increase in loans being mindful of bad loans. The next strategy is to pursue non-loan interest income generating activities if these banks are to improve on their cost efficiency.

4.4 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 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. The average revenue efficiency for all banks in the year 2017 was 82%, an improvement from the 67% level in 2016. The total variability in 2017 was at 17% compared to 21% in 2016. There was significant difference in revenue efficiency score between local banks and foreign in the year 2017 and 2016 with Mann-Whitney test score of 1.007 and 1.445 respectively.

PREM Bank, BARO and UBA scored 100% in both year 2017 and 2016 by way of revenue efficiency. FNBG, GCB, BSCI and Barclays scored 100% revenue efficiency in 2017, compared to 57.6%, 84.34%, 52.89% and 66.48% revenue efficiency score, respectively, in 2016.

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Table 21. Revenue Efficiency Score BANK 2017 Rank 2016 Rank PREM 100 1 100 1 UBA 100 1 100 1 BARO 100 1 100 1 GCB 100 1 84.34 9 BBLG 100 1 66.48 13 FNBG 100 1 57.6 20 BSCI 100 1 52.89 23 CAL 95.13 8 67.18 12 OMNI 93.56 9 66.33 14 FIDE 93.21 10 68.5 11 UMB 91.68 11 61.94 17 ZENI 86.64 12 58.53 19 ECOB 84.7 13 64.46 15 SCB 83.13 14 62.14 16 FBNB 82.93 15 100 1 PRUD 81.55 16 52.15 24 ADB 79.04 17 52.91 22 STAN 70.26 18 43.61 27 REPU 69.53 19 57.14 21 ACCE 67.33 20 61.38 18 ENER 64.43 21 40.14 28 GT 63.05 22 70.45 10 SG 62.48 23 50.37 25 HERI 58.39 24 FABL 55.37 25 46.79 26 BOA 38.2 26 37.35 30 ROYA 100 1 UNIB 100 1 BEIG 90.96 8 SOVE 38.29 29 Mean 17 67 Std. Dev. 17 21 Mann-Whitney test 1.007 1.445 Prob> |z| 0.314 0.1484

Among the last five banks in this category were: GT Bank, which, at 63.05% and 22nd place, recorded a lower score in 2017 than in 2016 when it was at tenth position with a score of

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70.45%. SG improved on its revenue efficiency score of 62.48% and placed 23rd in 2017, up from 25th in 2016 with a score of 50.37%. Heritage Bank recorded 58.39% and ranked 24th in 2017. FABL improved its revenue efficiency score to 55.37% in 2017 ranking 25th; it placed 26th in 2016 with a score of 46.79%. BOA recorded a marginal increase in revenue efficiency of 38.2% ranked 26th in 2017 compared to 37.35% in 2016 with a score of 37.35% and a placement of 30th.

We recommend that to improve on their revenue efficiency, GT, SG, FABL and BOA must create more loan income over non-loan income activities; however, in the case of HERI we hold the view that the pursuit of non-loan interest income would greatly improve its revenue efficiency.

4.5 Profit Efficiency

Profit efficiency considers banks‟ revenue efficiency and cost efficiency for the same three inputs and three outputs at their respective prices. The average industry profit efficiency was 68% in 2017, an increase from the 2016 profit efficiency level of 64%. The volatility in profit efficiency among banks in 2017 was 39% as against 41% in 2016. Mann-Whitney test scores of - 1.049 in 2017 and -1.669 in 2016 shows that there was no significant difference in profit efficiency between local and foreign banks in both years.

For the years 2016 and 2017, twelve banks recorded 100% profit efficiency in both years; these were FIDE, FAB, STAN, SCB, PREM, GCB, UBA, BBGL, BARO, CAL, ECO Bank, SG. ZENI Bank recorded 100% profit efficiency in 2017, an improvement from its 76.87% level and 16th position in 2016. ACCE Bank also recorded 100% profit efficiency in 2017 from 44.55% in the year 2016. BSCI recorded 100% profit efficiency in 2017 and 27.17% in 2016, placing 20th.

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Table 22. Profit Efficiency Score BANK 2017 Rank 2016 Rank FIDE 100 1 100 1 FABL 100 1 100 1 STAN 100 1 100 1 SCB 100 1 100 1 PREM 100 1 100 1 GCB 100 1 100 1 UBA 100 1 100 1 BBLG 100 1 100 1 BARO 100 1 100 1 CAL 100 1 100 1 ECOB 100 1 100 1 SG 100 1 100 1 ZENI 100 1 76.87 16 ACCE 100 1 44.54 18 BSCI 100 1 27.14 20 GT 49.92 16 100 1 ADB 40.37 17 14.58 25 REPU 40.29 18 14.83 24 UMB 33.8 19 22.3 22 BOA 31.25 20 65.69 17 PRUD 28.24 21 19.79 23 FBNB 23.89 22 36.45 19 FNBG 10.95 23 100 1 OMNI 9.36 24 -1.51 29 ENER 4.37 25 7.62 26 HERI (2.64) 26 UNIB 100 1 ROYA 25.47 21 BEIG 3.09 27 SOVE (0.84) 28 Mean 68% 64% Std. Dev. 39% 41% Mann-Whitney test -1.049 -1.669 Prob> |z| 0.2942 0.0951

The worst performers included: FBN Bank, which was 22nd in 2017 and had a dip in score from a 36.45% with 19th position in 2016, FNBG which was 23rd and had recorded a profit efficiency of 10.95%, a precipitous fall from its 100% profit efficiency in 2016, OMNI Bank which actually improved its profit efficiency to 9.36% and 24th rank from 29th ranking and -1.51% in 2016, ENER Bank recording4.37% in 2017 with 25th place down from its 2016 score of 7.62% and 2nd

43 position, and lastly HERI Bank which recorded a -2.64% profit efficiency in 2017 and ranked 26th.

FBNB and FNBG should consider creating more loans than investing in non-loan income generating activities if they are to improve on their profit efficiency. For OMNI and HERI bank, the strategy should aim at more investment in non-loan interest income activities if profit levels are to increase. ENER bank, on the other hand, should make fee and commission income activities a priority, with loan creation coming second, if its profit level is to increase.

4.6 Overall Performance

This metric is a sum of all the four measures used to assess the banks, namely technical efficiency, cost efficiency, revenue and profit efficiency. The industry mean point was 291.67 in 2017 compared to 259.27 points in the previous year. The deviation from this average was 79.57 in 2017 and 93.72 in 2016. Based on the Mann-Whitney test score of 0.027 in 2017 and -0.886 in 2016, we conclude that the difference in total points amassed between local and foreign banks in both years is insignificant.

The maximum score in this section is 400 points. BARO scored the total 400 points for both years, making it the most profitable bank. GCB scored 400 points placing first in 2017 but improving on its 2016 performance when it scored 384.34 points and came in second. BBGL Bank scored 400 points in 2017 ranking first and 366.48 points in 2016 ranking third. ECO Bank ranked fourth in both 2017 and 2016, scoring total points of 384.7 and 364.46 respectively. FIDE Bank ranked fifth in 2017 with a total of 374.95 points, improving from the 11th place in 2016 with total points of 316.54.

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Table 23. Overall Performance Bank 2017 Rank 2016 Rank BARO 400 1 400.00 1 GCB 400 1 384.34 2 BBLG 400 1 366.48 3 ECOB 384.7 4 364.46 4 FIDE 374.95 5 316.54 11 STAN 371.66 6 294.34 14 UBA 361.54 7 349.18 6 PREM 352.7 8 339.55 8 CAL 349.19 9 313.77 12 SG 344.02 10 320.85 10 SCB 332.01 11 347.37 7 FBNB 281.45 12 233.65 17 ZENI 281.18 13 277.59 15 FNBG 274.9 14 357.60 5 UMB 274.66 15 222.65 19 BOA 273.44 16 232.11 18 BSCI 265.41 17 121.24 26 PBL 251.24 18 205.98 22 ACCE 250.25 19 206.19 21 HERI 243.12 20 ADB 232.71 21 187.79 23 GT BA 219.98 22 216.96 20 OMIN 200.21 23 133.23 25 FABL 195.8 24 298.34 13 REPU 160.98 25 111.69 27 ENER 107.2 26 107.33 28 UNIB 326.10 9 ROYA 248.07 16 BEIG 157.34 24 SOVE 78.21 29 Mean 291.67 259.27 Std. Dev. 79.57 93.72 Mann-Whitney test 0.027 -0.886 Prob> |z| 0.9785 0.3758

GT Bank ranked 22nd in 2017 with total points of 219.98 compared to 216.96 points with a rank of 20th. OMNI Bank improved its total points to 200.21 in 2017 from 133.23 points and a 25th position in 2016. FABL dipped in performance in 2017, amassing 195.8 points for 24th position down from 298.34 points and 13th place in 2016. REPU Bank improved its performance to 160.98 points in 2017 from the 25th position. In 2016, the bank recorded 111.69 points at 27th

45 position. ENER Bank recorded 107.2 points in 2017 with a ranking of 26th a similar 107.33 points in 2016 at the 28th position.

4.7 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 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, GCB is adjudged to be the most profitable bank for the years 2017 and also 2016 with a score of 500 points in both years. BBLG also ranked first in 2017 as one of the profitable banks with 500 points, compared to second position in 2016 with 466.48 points. FIDE scored a total to 464.95 points placing third and 406.54 points taking the seventh position in 2016. ECOB ranked fourth in 2017 with points of 464.70 dropping from third position with 444.46 points in 2016. STAN Bank scored 461.66 points in 2017 at fifth position; this is an improvement of six places from their 2016 position when they scored 384.34 points.

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Table 24. Bank Regional Presence Performance Bank 2017 Rank 2016 Rank GCB 500 1 484.34 1 BBLG 500 1 466.48 2 FIDE 464.95 3 406.54 7 ECOB 464.7 4 444.46 3 STAN 461.66 5 384.34 11 SG 444.02 6 420.85 4 PREM 442.7 7 389.55 9 BARO 420 8 420 5 UBA 411.54 9 399.18 8 CAL 389.19 10 353.77 14 SCB 372.01 11 387.37 10 ZENI 361.18 12 357.59 13 ACCE 350.25 13 306.19 16 UMB 344.66 14 292.65 18 ADB 332.71 15 287.79 19 FBNB 331.45 16 283.65 21 BSCI 325.41 17 181.24 27 BOA 313.44 18 272.11 22 PBL 311.24 19 265.98 23 GT BA 289.98 20 286.96 20 FNBG 284.9 21 367.6 12 HERI 263.12 22 OMIN 260.21 23 193.23 25 FABL 245.8 24 348.34 15 REPU 240.98 25 191.69 26 ENER 147.2 26 147.33 28 UNIB 416.1 6 ROYA 298.07 17 BEIG 227.34 24 SOVE 98.21 29

HERI Bank ranked 22nd with total points of 263.12 OMNI Bank scored 260.21 points in 2017 ranking 23rd from 93.23 points and 25 position in 2016. FABL placed 24th with a total points of 245.80 from a 15th in 2017 as against the 348.34 points in 2016. REPU Bank ranked 25th in 2017 with 240.98 points; this was marginal improvement from the 26th position with a score of 191.69 point. ENER Bank ranked last in 2017 with 147.20 points at 26th compared to the 28th position in 2016 with 147.33 points.

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5.0 TOPICAL ISSUES ON CURRENT DEVELOPMENTS IN THE BANKING INDUSTRY OF GHANA.

Source: mydigitalfc.com.

5.1 Mergers and Acquisition

5.1.1 Introduction

In many instances, firms pursue growth through organic internal growth or external growthin order to increase their scale of operations. Internal organic growth is incremental extension of the firms operations by using retained earnings to create assets and expand product lines internally. In some other situations, firms may consider growing by buying or merging with other firms on the market. A merger is the pooling of business interest by two or more business entities which results in common ownership. Acquisition on the other is the taking over of smaller company(a target) by a larger company (a predator). Most times there are no traces of the target after the acquisition. In the corporate finance literature both mergers and acquisitions are referred to as mergers as this term appeals to the psychology of stakeholders of the target company.

5.2. Ghana Bank Mergers and Acquisition According to the Bank of Ghana (BoG) exposure draft on Mergers and Acquisition (2018), a merger is the fusion of two or more regulated financial institutions licensed or regulated under

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Act 930. On the other hand, an acquisition is the purchase of an institution licensed or regulated under Act 930 by another person or institution which makes the purchaser a significant shareholder in that institution. Included under the concept of acquisitions are takeovers.The main aim of mergers and acquisition is to maximize shareholders‟ value. External growth is mostly through merging or acquiring or companies or intangible assets or products lines on the market.

Banks‟ external growth strategy can be executed through assisted, forced or friendly conditions. Many times firms acquire or merge because of the need to increase revenue in the form of increasing market power, strategic revenue purpose and for marketing benefits. The merged firm, with this growth in market power, increases profit through the strategy of price leadership. In the pursuit of revenue benefit in mergers, managerial know how is critical in producing products or services efficiently with good pricing strategy. In other instances the reason for acquiring or merging is cost synergy through economics of scale. In this case as production volume increases, employing a fixed operating cost or economics of scope allows firms to reduce costs through the combination of complementary resources; for example, consolidating marketing departments. Financial synergy is accrued through the exploitation of reduced cost of capital, captured in a reduced weighted average cost of capital in a combined entity, tax benefits, the exploitation of debt capacity existing among the firms and the use of cash slack.

In emerging and frontier countries, bank mergers and acquisitions are frequently motivated by the objective of promoting stability in the banking industry. The banking sector in Ghana has recently experienced some of these happenings mainly because of the BoG‟s decision to strengthen the industry and to manage vulnerabilities that threaten the survival of the financial sector and, by extension, the economy.

The August 2017 absorption of UT Bank and Capital Bank into GCB can be described as an assisted takeover; PriceWaterhouseCoopers Ghana was assigned receivership role by BoG due to severe impairment of their capital. Exactly a year later, in August 2018, the BoG, in a move akin to a forced merger, created the Consolidated Bank Ghana (CBG) out of five banks - Beige Bank, Construction Bank, Unibank, Sovereign Bank and the Royal Bank. The reasons provided by the BoG includes with inadequate capital, high levels of non-performing loans, and weak corporate governance, with some banks obtaining their license under false pretenses through the use of suspicious and non-existent capital. The Ministry of Finance is currently the shareholder of CBG.

As the deadline to meet GH¢400 million capital requirement draws near, it is anticipated that those banks that want to continue operating as universal banks after December 2018, but may not be able to raise this capital from options such as using retain earnings, additional fund contributions from shareholders, such as issuing shares through initial public offerings resulting in listing on the Ghana Stock Exchange, would, in the current climate, have to undergo a friendly merger (friendly horizontal merge). Friendly mergers, such as that completed by BSCI and Omni

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Bank, are so termed because shareholders of the banks have a common goal which, in this case, is to meet the additional capital requirement. Furthermore, these banks have a similar range of products. The arguments of empire building, management hubris, overvaluation and a preemptive takeover strategy does not come to play in these friendly mergers envisioned. In instances where the acquisition is an unfriendly one, acquiring bank shareholders can suffer after the acquisition due to poor financial performance in the form of higher levels of inefficiency and negative returns.

The issues that would have to be resolved in all these mergers would border on board structures to reflect the ownership of the combined banks, a corporate governance system that reflects the stakeholder groups in the merged bank within the BoG corporate governance framework, the integration of systems and procedures, and the rationalization of personnel in the merged bank. Furthermore, resources would have to be devoted to building an organizational culture that pools all employees of merged banks into the combined bank family with the focus of building a strong brand on the market.

The benefits that we foresee for these merged banks are the transfer of new management technologies, the adoption of best banking practice among the merging banks, a larger market share, greater market power which can translate into providing superior products and services with its attendant high prices and economies of scale and scope. As in many of these bank mergers and acquisitions, we posit that the real results of these mergers would be evident two to three years later.

5.3 The other side of Bank Merger and Acquisition As banks merge, we anticipate a reduction in lending in the markets where in these banks operated prior to becoming one entity. This reduction in lending emanates from the need to rationalize the loan portfolio of the combined bank. Firms, especially small businesses that were sourcing for credit from these banks, would experience a decline in credit facilities as their ability to exploit the variation in loan products would be reduced. There would also be the termination of some pre-existing lending relationships. If these small and medium sized businesses maintained several lending relationships, then they would manage this reduction in credit availability. Newly established lending relationships would have less credit from these merged banks.

In many instances, many of these banks were small-sized banks with a strong focus on customer relations prior to their merger. Yet, the merged bank is likely to adopt a change in strategy as a new entity and this relationship base lending is likely not going to be the case anymore. Having increased in size, the merged bank usually tends towards a transaction based banking approach which focuses more on businesses with good corporate characteristics such as good reporting systems, good corporate governance structure and well balanced management team. These being

50 features more commonly associated with large corporate entities than small and medium size firms, merged banks‟ push for this type of “banker client coexistence” tends to deny many small businesses the pool of credit facilities to which they previously had access. It must be added that some merged banks may adopt a blend of relationship banking and transaction banking model as an optimal way of managing business clientele base.

Another effect associated with bank mergers is increase in market power, which the ability of a bank to influence the type of bank products offered customers mostly due to the size of the bank. The results of this would be the reduction in bank products and services where the merging banks have market overlap; a most significant effect would be the reduction in credit to small businesses. Other banks in the industry may not necessarily attempt to take advantage of this market opportunity, especially by assuming the lending opportunities that may emerge after the merger; hence there would be a likely decrease of credit in the market overall, especially in the short to medium term.

In markets where terminations of credit facilities follow a merger, a repercussion might be firms exiting the market due to their inability to secure credit. As previously mentioned, this is expected as other banks may not assume the opportunities that may show up in markets that have experienced a shrink in loan supply as a result of mergers. If there are no other sources of credit supply for these existing firms, then they would have to exit the market.

Conclusion Would the additional capital injection with its attendant mergers and acquisition improve the banking sector‟s stability? We wait to see. For some banking sector analyst, increasing bank capital increases bank capacity to assume more risk. Increasing bank capital also increases the buffer of funds available to payout depositors from shareholders‟ funds among other reasons. This approach does not resolve fundamental causes of poor banking practices and bank failures. For some analysts additional bank capital is a lazy way of regulating the banking industry as more bank capital means more shareholder cushion in the case of bank failure. These analysts construe such actions by regulators as shirking off their supervisory responsibilities through capital increases. The more likely situation to unfold in the Ghanaian banking landscape in the near future is both friendly and unfriendly mergers after meeting additional capital requirement December 2018 deadline.

If the underlying causes of high interest rates, high non-performing loans, a generally uncompetitive banking industry, weak corporate governance and lax supervision in addition to poor economic growth are not tackled, increasing the capital requirements for banks, with its attendant bank mergers and acquisitions, will not create the efficient and resilient banking sector that the BoG aims for Ghana.

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6.0 BANK CAPITAL: WHAT WE NEED TO KNOW

In 1989 the required bank capital was $740,700. This was increased to GHȼ7 million, then to GHȼ 60 million in 2008,GHȼ120 million in 2012, and, now, the recent increase of GHȼ 400 million by December 2018.

Source: marketbusinessnews.com

6.1 What is bank capital and the need for bank capital?

Bank capital is the difference between a bank's assets and liabilities and it represents the net worth of the bank or its value to investors. The asset portion of a bank's capital includes cash, government securities, and interest-earning loans (e.g., mortgages, letters of credit, and inter- bank loans); the liabilities section of a bank's capital includes loan-loss reserves and any debt it owes. A bank's capital can be thought of as the margin to which creditors are covered if the bank would liquidate its assets. Capital, broadly, represents shareholders‟ money on the balance sheet of a commercial bank. It is there to absorb losses. If losses are bigger than the capital cushion, the bank is bust.

Bank capital represents the value of a bank's equity instruments that can absorb losses and have the lowest priority in payments if the bank liquidates. While bank capital can be defined as the difference between a bank's assets and liabilities, national authorities have their own definition of regulatory capital.

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In banking, the term capital is used instead of other more often used accounting terms such as net worth or equity; however, these terms are synonyms. Banks need capital for protection in case of losses on loans or other assets.

The main banking regulatory framework consists of international standards set by the Basel Committee on Bank Supervision through international accords of Basel, Basel II, and Basel III. These standards provide a definition of the regulatory bank capital that market and banking regulators closely monitor.

6.1.1 Book Value of Shareholders' Equity

Bank capital can be thought of as the book value of shareholders‟ equity on a bank's balance sheet. Because many banks revalue their financial assets more often than companies in other industries that hold noncurrent assets at a historical cost, shareholders' equity can serve as a reasonable proxy for the bank capital. Typical items featured in the book value of shareholders' equity include preferred equity, common stock and paid-in capital, retained earnings, and accumulated comprehensive income. The book value of shareholders' equity is also calculated as the difference between a bank's assets and liabilities.

6.1.2. Regulatory Bank Capital

Because banks serve an important role in the economy by collecting savings and channeling them to productive uses through loans, the banking industry and the definition of bank capital are heavily regulated. While each country can have its own requirements, the most recent international banking regulatory accord of Basel III provides a framework for defining regulatory bank capital.

According to Basel III, regulatory bank capital is divided into tiers. These are based on subordination and a bank's ability to absorb losses with a sharp distinction of capital instruments when it is still solvent versus after it goes bankrupt. Common equity tier1 (CET1) includes the book value of common shares, paid-in capital, and retained earnings less goodwill and any other intangibles. Instruments within CET1 must have the highest subordination and no maturity.

Tier 1 capital includes CET1 plus other instruments that are subordinated to subordinated debt, have no fixed maturity and no embedded incentive for redemption, and for which a bank can cancel dividends or coupons at any time.

Tier 2 capital consists of unsecured subordinated debt and its stock surplus with an original maturity of fewer than five years minus investments in non-consolidated financial institutions subsidiaries under certain circumstances. The total regulatory capital is equal to the sum of Tier 1 and Tier 2 capital.

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6.2 The Basel Committee

Source: www.metaphorbusinessgraphics.com .

The Basel Committee on Banking Supervision (BCBS) was founded in 1974 with a membership of G10 countries. The objective was to achieve new international financial structures as replacement for the failed Bretton Woods institutional system. The committee is headquartered in the offices of the Bank for International Settlements (BIS) in Basel, Switzerland. The BCBS is an international committee formed to develop standards for banking regulation; it is made up of central bankers from 27 countries and the European Union.

Basel II is a set of international banking regulations forth by the Basel Committee on Bank Supervision, which leveled the international regulation field with uniform rules and guidelines. Basel II expanded rules for minimum capital requirements established under Basel I, the first international regulatory accord, and provided framework for regulatory review, as well as set disclosure requirements for assessment of capital adequacy of banks. The main difference between Basel II and Basel I is that Basel II incorporates credit risk of asset held by financial institutions to determine regulatory capital ratios.

6.2.1 Basel Accords

The BCBS has developed a series of highly influential policy recommendations known as the Basel Accords. These are not binding, and must be adopted by national policymakers in order to

54 be enforced, but they have generally formed the basis of banks' capital requirements in countries represented by the committee and beyond.

The first Basel Accords, or Basel I, was finalized in 1988 and implemented in the G10 countries, at least to some degree, by 1992. It developed methodologies for assessing banks' credit risk based on risk-weighted assets and published suggested minimum capital requirements to keep banks solvent during times of financial stress.

Basel I was followed by Basel II in 2004, which was in the process of being implemented when the 2008 financial crisis occurred. Basel III was introduced in order to more accurately calculate risk that presumptively contributed to the banking crisis that required banks to hold higher percentages more liquid assets and to have higher levels of equity or capital in their capital structure. It was initially agreed upon in 2011 and scheduled to be implemented by 2015, but as of December 2017 negotiations continue over a few contentious issues. One of these is the extent to which banks' own assessments of their asset risk can differ from regulators'; France and Germany would prefer a lower "output floor," which would tolerate greater discrepancies between banks' and regulators' assessment of risk. The United States, on the other hand, wants the floor to be higher.

Bank regulators of individual countries do not act alone in setting rules for bank capital. They coordinate their capital regulation through the Basel Committee on Bank Supervision. The Committee meets at the bank for International Settlements (BIS), an international organisation, founded in 1930, which fosters monetary and financial cooperation and acts as a bank for central banks.

The Basel Committee periodically issues "accords” that set out international standards for bank capital as well as other bank regulations. The first Accords now called Basel I, were issued in 1988. They were replaced by a new set for standards, Basel II, in 2004.Unfortunately, Basel II, failed to prevent the global financial crisis that began in2007. Government rescues of failed banks like Citibank (US), RBS (UK) and Fortis (EU) cost taxpayers billions of dollars, pounds and euros. Basel II was a failure due to two main factors. First, banks could state higher levels of capital than they really had. Secondly, the risks banks faced were permitted to be understated. Having this was contrary to the belief of most bankers that the most accurate measure of bank's exposure to risk is the tangible common equity (TCE). Tangible assets include only those like loans, securities, and buildings that could be sold by a failing firm to help pay its obligations. Equity capital equals tangible assets minus liabilities. It measures shareholders‟ funds that are first in line to absorb risk in case of failure.

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Source: bankersupdate.blogspot.com

Basel II regulations did not use TCE to measure risk. Instead, they used the ratio of regulatory capital to risk-weighted assets. Both the numerator and the denominator differ from the tangible common equity concept. Regulatory capital increases the numerator of a bank's capital ratio in two ways compared with TCE. First it counts certain intangible assets that contribute to possible future profits but could not be sold by a failing firm to raise cash. Second, it counts both common equity and hybrid capital(such as preferred stock) that is a mixture of debt and equity. Hybrid capital is a less reliable cushion against loss than common equity. For the denominator of the capital ratio, Basel II did not count all assets at full value. Instead, assets were assigned risk weights according to their ratings.

In an attempt to fix the problems of Basel II, regulators have reached a new agreement, known as Basel III. Proposed improvements include: A better measurement of capital, closer to tangible common equity (exactly). Requirements for banks to build extra capital reserves if early warning signs show abnormal credit growth or assets price bubbles.

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6.3 Arguments on Bank Capital

6.3.1 The support for Bank Capital

There is wide support for the role of capital regulation on financial sector soundness and stability in the literature. According to VanRoy (2003), financial stability and reduced risks were promoted in the early 1990s due to the presence of stringent in the G10 countries. It has been shown by Furlong and Keeley (1989) and Keeley (1990) that having higher capital requirements minimize the incentives for risk taking by a value-maximizing bank leading to improved bank stability. Bolt and Tieman (2004) argue that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria for granting new loans thereby reducing their exposure to default risk. Other studies have found that higher capital reduces banks‟ exposure to systemic risk (De Jonghe,2010; Martinez-Miera and Suarez, 2014) and reduces the chance of banking crises (Miles et al., 2012).

6.3.2. The other side of Increasing Bank Capital

Increasing banking capital, has been found by other authors, to have destabilising effects. Mention can be made of work by Besanko and Kanatas (1993) and Boot and Greenbaum (1993) who find that the incentive to monitor is minimised by higher capital requirements resulting in lower bank portfolio quality and higher risks of instability. Berger and Mester (1997) find that beyond certain thresholds, banks become inefficient and unstable. Hakenesand Schnabel (2010) on the other hand show that tighter capital requirements increase the risk of individual loans and may also increase a bank‟s probability of default because they relax the competition for loans and thus destabilizing the banking sector. According to these studies, increased capital requirement does not necessarily lead to stability.

6.3.3. Bank Capital and Competition

On capital requirement and competition, Amel, Barnes, Panetta and Salleo (2004)finds that commercial banks operating beyond a certain size(measured by total assets) have higher operating costs and operating beyond lowest average cost introduce inefficiencies and instability that reduce competition in the market. Tying the findings of Berger and Mester (1997) and Amel et al. (2004) that too big banks (beyond a certain threshold) are more inefficient and unstable and the findings of Berger et al. (1993) that most efficient banks have substantial cost and competitive advantages over those with average or below average efficiency, it can be inferred that too big banks may not only be unstable but also uncompetitive. In the European Union for example, it was discovered by Bikker and Groeneveld (1998) in their assessment of the competitive structure in the banking industry, that that concentration impairs competitiveness. Other authors such as Salas and Saurina, (2003) and Claessens and Laeven, (2004) established similar findings. In Africa, no specific studies that examine the effects of increased capital

57 requirements on bank stability, has been found by the authors. There are however a number of studies that examine this issue in developing and transitional countries in general. Hussain and Hassan (2005) in a study of 11 commercial banks in developing countries, shows that capital regulations reduced portfolio risk in those countries. Agoraki et al. (2009) on the other hand finds that capital requirements are effective in monitoring risk-taking as they increase equity to capital ratios and decrease credit risk but this effect weakens for banks with sufficient market power.

6.4 Functions of Bank Capital

6.4.1 The loss-absorbing function

Capital is needed to allow a bank to cover any losses with its own funds. A bank can keep its liabilities fully covered by assets as long as its aggregate losses do not deplete its capital.Any losses sustained reduce a bank‟s capital, set off against its equity items (share capital, capital funds, profit-generated funds, retained earnings), depending on how its general assembly decides. Operating losses (a business result which, as far as income and expenses are concerned, does not include the generation and disposal of provisions and reserves) is notan all too common phenomenon in banks. Banks usually take good care to set their interest margins and other spreads between the income derived from and the cost of borrowed funds to cover their ordinary expenses. That is why operating losses are unlikely to wear off capital on a long-term basis. This can be said especially of banks with a long and sound track record who, owing to their past efficiency, have managed to generate a sufficient amount of own funds to easily cope with any operating losses. In a new bank without much success history, however, operating losses may end up driving capital below the minimum level set by law. Banks run a considerably greater risk of losses resulting from borrower defaults, rendering some of their assets partly or entirely irrecoverable.

6.4.2. The confidence function Depositors and bank creditors have to be convinced that their bank deposits and assets are safe. Thanks to its loss absorbing capability, bank capital indicates a bank‟s ability to cover its liabilities with assets, thus building and sustaining its credibility. If capital falls below the law- required level and the bank fails to do something about the situation, there is a good reason to revoke its license. Adequate capital power, apart from simply indicating that a bank has enough assets to back its liabilities, also indicates that deposits and other liabilities are balanced by assets which either yield a financial flow in the ordinary course of banking business (loans, debt securities) or can be sold should the need arise (securities in general). Here, it is a crucial

58 requirement that a bank‟s capital cover its fixed investments (fixed assets, participating interests in subsidiaries) used in its business operation, which usually produces no financial flow.

A bank known for having capital problems is bound to see its interbank market confidence disappear sooner or later. Depending on how grave its predicament is, other banks are likely to cut back or shut down their credit lines. A bank locked out of the interbank market has no way of refinancing its liquidity needs, which puts it under some heavy pressure. In an attempt to replenish its liquidity it will approach depositors, trying to attract them with higher interest rates. In such a situation, however, deposits do not make up just for a temporary lack of liquidity, as its liquidity problems turn chronic. A low capital level gives away missing financial flows caused by losses stemming from bad loans or inefficient bank operation. The bank is forced to use deposits as a permanent substitute. In the process, their interest costs put an additional strain on its business results and erode its capital. High deposit rates often attract customers to such a degree that new deposits, apart from covering deposit calls, end up inflating the bank‟s total assets or liabilities. The bank appears to be thriving until the news of its problems, which earlier prompted the better informed banking sector to drive it out of the interbank market, becomes common knowledge and triggers a depositor onslaught too massive for the bank to handle without external assistance.

While discussing the market confidence function, we need to mention the possible inclusion of subordinated debt in the capital base. Reported as part of a bank‟s debt in its balance sheet, subordinated debt ranks after all other creditors‟ claims in case of bankruptcy, composition or winding-up. In case a bank faces the problems discussed above, subordinated creditors are the last in line for settlement. Losses cannot be set off against subordinated debt as it does not qualify as own funds. So, if we underscore the loss-absorbing function of capital, it cannot be included in capital. Subordinate debt says nothing about the bank‟s ability to meet its creditors‟ claims in general. Nevertheless, subordinated debt can have a confidence boosting effect on depositors and bank creditors, as it gives them protection from losses. Any losses uncovered by own funds primarily impact subordinated creditors. Thus, by including subordinated debt in capital, we can tell what losses a bank can take without any effect on regular creditors. Bank confidence can be further supported by the fact that subordinated creditors, despite being aware of their subordinated ranking, are not afraid of losing their money, which implies a positive view of the bank‟s situation.

Given its usually long maturities, subordinated debt has a financing quality to it as well, providing funds suited to finance non-current assets. Due to the controversy about its recognition as a part of capital base, there are certain restrictions applied in its inclusion.

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6.4.3 The financing function

As deposits are unfit for the purpose, it is up to capital to provide funds to finance fixed investments (non-current assets and interests in subsidiaries). This particular function is apparent when a bank starts up or when money raised from subscribing shareholders is used to buy buildings, land and equipment. It is desirable to have permanent capital coverage for non-current assets. That means any additional investments in non-current asset should coincide with a capital rise.

During a bank‟s life, it generates new capital from its profits. Profits not distributed to shareholders are allocated to other components of shareholders‟ equity, resulting in a permanent increase. Capital growth is a source of additional funds used to finance new assets. It can buy new non-current asset, loans or other transactions. It is good for a bank to place some of its capital in productive assets, as any income earned on self-financed assets is free from the cost of borrowed funds.

6.4.4.The restrictive function

Capital is a widely used reference for limits on various types of assets and banking transactions. The objective is to prevent banks from taking too many chances. The capital adequacy ratio, as the main limit, measures capital against risk-weighted assets. Depending on their respective relative risk, the value of assets is multiplied by weights ranging from 0 to 20, 50 and 100%. We use the net book value here, reflecting any adjustments, reserves and provisions. As a result, the total of assets is adjusted for any devaluation caused by loan defaults, non–current asset depreciation and market price declines, as the amount of capital has already fallen due to expenses incurred in providing for identified risks. That exposes capital to potential risks, which can lead to future losses if a bank fails to recover its assets. The minimum required ratio of capital to risk-weighted assets is 8 percent. Under the applicable capital adequacy decree, capital is adjusted for uncovered losses and excess reserves, less specific deductible items.

In the restrictive function context, it is the key importance of capital and the precise determination of its amount in capital adequacy calculations that make it a good base for limitations on credit exposure and unsecured foreign exchange positions in banks. The most important credit exposure limits restrict a bank‟s net credit exposure (adjusted for recognisable types of security) against a single customer or a group of related customers at 25% of the reporting bank‟s capital. This should ensure an appropriate loan portfolio diversification. The decree on unsecured foreign exchange positions seeks to limit the risks caused by exchange rate fluctuations in transactions involving foreign currencies, capping unsecured foreign exchange positions (the absolute difference between foreign exchange assets and liabilities) with the euro region it is at 15% of a bank‟s capital, or 10% if in any other currency.

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Due to the importance of capital, it has assumed a central stage in banking. In the developed countries, the share if capital in total assets or liabilities ranges from 2.5%-8% this seemingly low level is generally considered sufficient for a sound banking operation. Able to operate at the lower end of the range are large banks with a quality and well-diversified asset portfolio. Capital adequacy deserves constant attention. Asset growth needs to respect the amount of capital. Eventually, any problems a bank may be facing will show on its capital. In commercial banking, capital is the king.

6.5 Implication of additional Capital by Bank of Ghana “Free”bank capital (capital in excess of minimum capital requirements) could be used by banks to finance consumption or profitable investments (or more generally to protect a lending relationship in the case of a negative shock, such as a monetary tightening). This explanation implies that equity reacts to cycle conditions. Well-capitalised banks are perceived as “less risky” by depositors and investors and have easier/cheaper access to forms of funding such as bonds or uninsured deposits. As banks in Ghana exceed the additional capital requirement, we expect different banking strategy and financial stability the banking sector in the years to come to ease restore the confidence in the banking system that has suffered some setbacks because of the failed banks in recent times.

Increased capital requirements concentrate the banking industry reducing competition while not guaranteeing financial sector stability. There evidence which shows that increased capital beef- up significantly increases financial instability in many economies in Africa (except in big banks) implying that higher capital requirements did not make African banks safe a caution to the BoG and banks in general.

Increasing bank capital would competitive pricing for foreign banks while it makes domestic banks less competitive mainly attributed to the high cost of sourcing and holding extra capital for domestic banks compared to foreign banks who can source cheaper capital from parent companies. This case is very evident in Ghana as foreign banks have displayed little difficulty in scouring for additional funds in time past and in the current situation, compared to domestic banks.

6.6 Strategies to increase Capital

6.6.1 Channels of adjustment A bank that seeks to increase its risk-adjusted capital ratio has a number of options at its disposal. One set of strategies targets the bank‟s retained earnings. The bank could seek to reduce the share of its profit it pays out in dividends. Alternatively, it may try to boost profits themselves. The most direct way to do so would be by increasing the spread between the interest

61 rates it charges for loans and those it pays on its funding. Lending spreads would rise across the system if all banks followed a similar strategy and alternative funding channels (such as capital markets) did not offer more attractive rates. Other ways to increase net income include increasing profit margins on other business lines, such as custody or advisory services, reducing overall operating expenses, or engaging in cheaper (but potentially riskier) funding strategies. Higher bank lending spreads or fees need not be evidence of cartel behavior - rather, they would simply reflect the incorporation of higher industry-wide costs (in this case, the cost of accumulating additional capital) into a higher required return on assets.

A second strategy is to issue new equity, such as through a rights issue to existing shareholders, an equity offering on the open market or placing a bloc of shares with an outside investor. This is likely to be the least attractive option for bank shareholders, however, given that a new share issue tends to reduce the market value of the existing shares.

A third set of adjustment strategies involves changes to the asset side of the bank‟s balance sheet. The bank can run down its loan portfolio, or sell assets outright, and use the proceeds of loan repayments or asset sales to pay down debt. Less drastically, it can slow down lending growth, thereby allowing retained earnings and hence capital to catch up. In some cases, an asset sale can boost capital through an accounting gain, as the assets are revalued relative to their purchase cost.

Finally, a bank can seek to reduce its risk-weighted assets by replacing riskier (higher-weighted) loans with safer ones, or with government securities. Banks‟ choices across this set of strategies will shape the macroeconomic impact of an increase in regulatory capital ratios. It should be emphasised that neither a reduction in outstanding bank loans nor a slowdown in the growth of bank lending would necessarily be bad for the macroeconomy in the longer term. This is especially the case in the aftermath of a crisis that followed an unsustainable debt boom and left debt overhangs in its wake.

Some observers nevertheless expressed concern during the debate over the Basel III framework that, if regulators and markets forced banks to build up capital too rapidly, this would impose considerable short-term macroeconomic costs by inducing banks to pull back from lending to finance investment. In response to these concerns, a number of studies attempted to assess the scope of the potential macroeconomic impact of stronger regulation.

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7.0 MANAGING HUMAN CAPITAL IN THE SURVIVING BANKS.

Source: www.thebalancecareers.com

7.1 Introduction Human capital is the most valuable asset any organisation could boast of, hence must be managed properly to enable the organisation derive the best out its workforce. The stiff competition in the banking sector coupled with major shakeups that have led to the collapse of five indigenous Ghanaian banks into what is now known as the Consolidated Bank Ghana will have severe implications for both the organisation and employees and the banking industry in general. Obviously, the first major change associated with this crisis is downsizing. Although there are anticipated benefits of downsizing such as cost cutting and increased operational efficiency, its effect on employee morale is enormous. Downsizing can threaten employee sense of well-being; it leads to decrease in employee morale, loyalty and job satisfaction. Employee uncertainty and fear can paralyse the bank resulting in significant decline in trust and motivation; likely to affect overall performance of organizations.

Surviving employees may also perceive these banks to have behaved unjustly and thus regard their jobs as less secure. They may give up on the company and believe that their contributions to the company will not be recognised and rewarded in future. Survivors can become unduly risk averse, less creative and less open to change. It is important that management of banks are

63 mindful of the psychological contract between the employee and the employer as employees expect their jobs to be secured, a top most priority in any employment relationship.

Henceforth, before any bank introduces any major changes or engages in redundancy, it is in their own interest to involve employees of the bank at all levels in the entire process. Employees should be informed about the nature of the change and the category of workers that are likely to be affected by the change. The organisation should clearly communicate to employees when the change is taking place, the nature and composition of the compensation package and timelines for payments if any. When these steps are taken, it would help ease the tension, uncertainty and chaos that we have witnessed in the Consolidated Bank saga. Of course, it is the right of employees to access every information relating to their terms and conditions of engagement with the employer.

In addition, surviving banks can boost employee morale by introducing employee counselling and relocation assistance programmes to ease the hardships associated with lay-offs. Employees should also be encouraged to participate in game activities that are specifically designed to test problem solving skills. This will help stimulate team work and cooperation.

Source: www.analyticsinhr.com

7.2 Work motivation To increase work motivation, managers should use goal-setting strategy. Employee participation in goal-setting encourages employees to accept and commit to the goal. Successful implementation of this strategy requires that managers ensure employee participation, supervisory commitment and useful performance feedback. As goal-setting involve planning and

64 evaluation, the performance reviews must be tailored to the banking business, it should capture what goes on in the business and be easily adapted to business changes. Encouraging employees in banks to set specific and challenging goals that focus attention on exactly what should be accomplished can assist in achieving superior performance. As such, goal-setting can increase work motivation and task performance, it can reduce stress and improve accuracy and validity in performance evaluation.

7.3 Job satisfaction The recent changes in the banking business may also impact employees‟ Job satisfaction - the degree to which individuals feel positively or negatively about their jobs. It is emotional response to one‟s tasks including the physical and social conditions of the workplace. It sounds logical for managers and employees to generally believe that happy or satisfied employees are more productive at work.

There are five important facets of job satisfaction that can influence whether employees develop positive feelings about their work. These are: the work (responsibility, interest and growth); quality of supervision (technical help, social and organisational support); relationships with coworkers (social harmony and respect); promotion opportunities (chances for further advancement); and pay (adequacy of pay and perceived equity inherent in the pay structure).

7.4 Job Performance The proposition is that proper allocation of rewards can positively influence both performance and satisfaction. For example, employees who receive high rewards often report higher job satisfaction. While rewarding a low performer with small rewards may lead to initial dissatisfaction, the expectation is that the employee will make efforts to improve performance to obtain greater rewards in the future. Employees who receive rewards that are contingent on performance tend to perform better. Hence, managers who want to enhance employee performance must ensure that rewards are valued by employees and are tied directly to performance.

It is important mangers in the banking sector consider job satisfaction and performance as two separate but interrelated work results that are affected by how employees are rewarded. While job satisfaction alone is not a good predictor of work performance, well-managed rewards can have a positive influence on both satisfaction and performance. For this reason, Human Resource (HR) managers in the banking sector need to focus on merit pay- a compensation system that bases an individual‟s salary on how well the person has performed during a specified time period. Given that the implementation of merit pay plans are difficult to achieve, it is beneficial for HR managers to take into account the following in order to effectively implement merit pay plans. Thus, a merit pay plan must be based on realistic and accurate measures of individual work performance; it should create a belief among employees the way to achieve high pay is to

65 perform at high levels; and the pay plan should clearly discriminate between high and low performers regarding the amount of pay received.

In addition to merit pay, Ghanaian banks can adopt creative pay practices in order to remain competitive and get more from their workforce. These creative schemes may include skilled- based pay, gain-sharing plans, lump-sum pay increases, bonus share schemes and flexible benefit plans. Such non-traditional practices can assist employers derive the best from employees and secure their commitment as their performances are not solely rewarded by financial outcomes. Employees‟ satisfaction with managerial style relates positively to employee satisfaction. Banks in Ghana banks must ensure managers adopt appropriate managerial styles that are responsive to the needs and ideas of employees. Employees must not be left out in the decision making process; their views and contributions must receive the needed attention.

7.5 Organisational Commitment Closely linked to job satisfaction is organisational commitment - the degree to which a person strongly identifies with, and feel part of, the organisation. It reflects an employee‟s intention to remain in an organisation because of a strong desire to do so. To secure commitment of employees, banks need to ensure employees‟ jobs are secured. They must be involved in the decision-making process, grant them autonomy and make the work interesting and more satisfying. Bank leadership can also increase employee commitment by communicating their appreciation of employees‟ contributions. They should demonstrate their concern for employee‟ well-being and emphasise values such as moral integrity, fairness, creativity and openness. Employees who are committed willingly direct their effort toward accomplishment of organisational goals. They are also less likely to leave the organisation.

7.6 Employees and Emotional Labour Employees in the banking sector are required to display organizationally desired emotions in performing their jobs. They are supposed to appear approachable, friendly and polite while taking care of their customers. It can be difficult for employees to continually project the desired emotions associated with their job. For example, being „happy‟ and „helpful‟ with a customer might seem too daunting a task for someone who is in a bad mood. This can result in emotional dissonance; thus, an individual is expected to act with one emotion while feeling another. One‟s emotion frequently crosses boundaries between self and society, private and public, formal and informal. Employees on daily basis manage their mixed emotions in order to both enjoy and endure the rigours of organisational life. Managing employees‟ emotions in the workplace includes recognizing the potential transformative power of human action. Managers as well need to recognise the emotive forces that inhibit organizationally desirable behaviours. In addition, managers themselves need to be emotionally competent in order to understand and manage emotions of their subordinates. As emotional intelligence affects the way leaders make decisions. For example, under high stress, leaders with high emotional keep their cool and make better decisions.

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Conclusion To effectively deal with employees‟ anxiety in the industry, management must always provide accurate and timely information. This can assist in preventing unfounded fears and potentially damaging rumours from developing as these rumours may influence decisions of customers either to stay or switch to other banks. Open communication in a culture of trust is essential for successful change. Surviving employees should be educated on new work roles and procedures, as well as criteria for rewarding their performances. Trust is also an essential element to manage employees‟ anxiety in the consolidated bank. Thus, the willingness to be vulnerable to the actions of another. The implication is that bank employees would expect and believe that their leaders will act with employees‟ welfare in mind. While trust among top management team members facilitate strategy implementation, employees who trust their leaders will buy into their decisions more readily. Participative, considerate leader behaviours that demonstrate a concern for people appear to enhance the health and well-being of employees in the work environment. Hence, senior management of banks should be interested in such leadership behaviours.

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Appendix Abbreviations for Banks

DMU Name of Bank ACCE Access Bank (Ghana) Limited ADB Agricultural Development Bank Limited BBLG 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 FABL First Atlantic Bank Limited FBNG First Bank Nigeria Ghana limited. FIDE Fidelity Bank Ghana Limited FNBG First National Bank Ghana limited GCB GCB Bank Limited GT BA 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 ZENI Zenith Bank (Ghana) Limited

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Source: comptia.org

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