US embassy cable - 04ACCRA1810

UNCLAS SECTION 01 OF 03 ACCRA 001810 
 
SIPDIS 
 
SENSITIVE 
 
MCC FOR ROD NORMAN 
TREASURY FOR ALEX SEVERENS 
 
E.O. 12958: N/A 
TAGS: KMCA, EFIN, ECON, GH 
SUBJECT: SURVEY OF GHANA'S EVOLVING BANKING SECTOR 
 
 
Summary 
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1. (SBU) The Government of Ghana's (GoG) sound macro policies 
have led to lower inflation and interest rates, paving the 
way for local banks and insurance companies to introduce 
innovative new products and vie for the 95 percent of 
Ghanaians who do not use the formal financial system.  Banks 
can no longer survive on high-interest bearing government 
securities, and must aggressively compete for the relatively 
few low-risk clients for loans and other financial products. 
Banks must contend with the Central Bank's recently mandated 
higher capital requirements.  Econoffs surveyed the most 
competitive of Ghana's 18 banks, and also met with insurers 
and regulators.  While bankers largely express optimism about 
Ghana's economy and their own growth opportunities, they are 
aware that stronger competition and stiffer regulation will 
likely instigate mergers, acquisitions, and failures in the 
next few years.  End Summary. 
 
Background on the Banking Environment 
------------------------------------- 
2. (SBU) Large government deficits and debt, volatile 
inflation, and high interest rates over the last 20 years 
limited development of Ghana's financial sector.  This 
macroeconomic instability has been accompanied and 
exacerbated by: (i) government hoarding of the available 
credit, (ii) heavy government ownership in financial sector 
companies, (iii) inconsistent yet excessive regulation, and 
(iv) high (44 percent) reserve requirements.  Given these 
impediments, it is little wonder that the banking system 
serves only five percent of Ghanaian households.  However, 
there have been signs of improvements in the last year.  Post 
met recently with banks, insurance companies and government 
regulators to discuss how the changing macroeconomic 
environment is affecting bank operations, and to gauge 
whether stronger competition and new regulatory requirements 
could provoke a shakeout in the industry. 
 
3. (SBU) Tighter monetary policy and more prudent fiscal 
policies together have forced down inflation and interest 
rates.  The 91-day Treasury Bill, considered the benchmark 
rate in Ghana, fell from a high of 35 percent in 2003 to the 
current 17 percent rate.  The 12-month inflation rate peaked 
at 30 percent in April 2003, and fell to 10.5 percent in 
April 2004.  Year-on-year inflation increased slightly to 
12.4 percent in July 2004 and is expected to stay in the 
10-15 percent for the rest of the year. 
 
4. (SBU) A frequent criticism of Ghana's banking sector has 
been that banks have no incentive to lend as long as they can 
be profitable simply holding T-Bills and rolling them over 
every 91 days.  Banks respond that the Bank of Ghana (Central 
Bank) requires them to hold government securities in order to 
fulfill the 35 percent secondary reserve requirement (Note: 
the primary reserve requirement is nine percent.  End Note). 
While true, Ghanaian banks have willingly met these 
requirements, since high interest rates on government 
domestic debt have resulted in Ghanaian banks having among 
the highest return on equity of any banking system in Africa. 
 (Note:  Ghanaian banks also profit from the 10-15 percent 
spreads between lending and saving rates, although this 
should diminish as banks compete to attract new customers. 
End Note) 
 
5. (SBU) With rates edging downwards, margins are shrinking 
and banks are being forced into serving their traditional 
financial intermediary role to maintain profit levels.  At 
the same time, the Bank of Ghana has issued new prudential 
regulations giving banks until 2005 to increase their 
capitalization to 70 billion cedis (about USD 7.8 million). 
Combined, these events may force local banks, especially the 
marginal performers, to reform, merge or fail. 
 
Impact of Lower Interest Rates on Banking Sector 
--------------------------------------------- --- 
6. (SBU) There are 18 banks operating in Ghana, with four of 
them holding 64 percent of assets.  The Bank of Ghana has 
also received several applications to establish new banks. 
Most bankers and the Bank of Ghana bank supervisors believe 
this number is too high for the market, and expect increased 
competition and new capital requirements to force a wave of 
mergers or closures in the next few years.  The regulators 
were noncommittal on whether the GoG would allow bank 
failures or intervene in the market. 
 
Focus on SME Lending 
-------------------- 
7. (SBU) In response to the changing market, the most 
competitive Ghanaian banks -- Ecobank, SG-SSB, Home Finance 
Company (HFC) -- are launching innovative products to attract 
new customers.  Banks are also considering riskier small and 
medium size enterprises (SMEs) because established companies 
and individuals already have banking relationships.  All the 
banks Post conferred with emphasized how important it was now 
to cater to SME clients.  However, Ecobank, HFC and other 
medium-sized but aggressive banks are making this sector a 
priority.  Ecobank is leading the way with over 30 percent of 
its USD 80 million portfolio targeted to the SME sector. 
Large banks in Ghana insist they are maintaining 
profitability through higher fees and increased volume, but 
are also being forced to pursue SME clients.  Even Standard 
Chartered, which traditionally serves blue chip companies, is 
eyeing the SME market. 
 
8. (SBU) SME lending involves more rigorous client 
interaction and more detailed investigation of the quality of 
business proposals.  SG-SSB, a bank in which French company 
Societe Generale recently bought a controlling share, told 
Post that it can take three weeks to process a loan from a 
new SME client, demonstrating how much time and effort is 
needed.  Across the industry, the number of staff and their 
required skills will also need to expand, and banks will also 
have to update software platforms and even move branch 
locations to serve SMEs.  The extra effort will increase 
operating expenses and reduce profitability in the short 
term.  However, in the long run, banks that successfully 
develop these clients without increasing their level of 
non-performing loans (NPLs) should maintain a competitive 
advantage over the less adaptive banks. 
 
9. (SBU) Ghana's banks are still recovering from the massive 
devaluation of the cedi in 2000/2001, causing many companies 
to default on their loans.  The NPL rate peaked in 2001 at 28 
percent and has fallen only to about 20 percent (2003 data). 
Defaults are generally higher when interest rates are high. 
As rates become more affordable, a riskier clientele will 
enter the system, but these clients will also have less 
trouble servicing their debts.  So, the quality of bank 
portfolios should improve in a stable, lower-interest rate 
environment. 
 
Concerns Over Currency Risk 
--------------------------- 
10. (SBU) A growing concern among bankers is the growth of 
dollar-denominated loans.  Over the last few years, 
businesses seeking lower interest rates have increasingly 
sought to borrow in dollars.  This violates the banking adage 
that you should borrow in the currency in which you do 
business.  Similar circumstances developed in the late 1990s, 
which contributed to the high NPL rate following the cedi 
depreciation in 2000.  Ghana remains extremely vulnerable to 
external shocks and commodity price shifts, which could in 
turn affect the exchange rate.  Although several bankers 
voiced concerns about the increased currency risks, they also 
acknowledged their limited ability to reject requests for 
dollar loans due to their fear of losing valuable clients to 
competitor banks. 
 
Government Involvement in Financial Sector 
------------------------------------------ 
11. (SBU) Bankers were unanimous in their optimism that the 
GoG will maintain macroeconomic stability.  All cautioned 
that the single-digit inflation projection for 2004 is 
unlikely, but emphasized that consistent and stable inflation 
is a more important goal in the short to medium term.  They 
broadly criticized the GoG's ownership position in the 
financial sector, especially in parastatals Social Security 
National Trust (SSNIT) and Ghana Commercial Bank (GCB). 
SSNIT is one of the biggest drags on the financial sector. 
It holds 15 percent of total financial sector assets, yet is 
poorly run and politically influenced.  GoG commitment to 
overhauling SSNIT management would improve overall asset 
quality in the country. 
 
12. (SBU) Although GCB is the largest bank in Ghana, holding 
24 percent of total banking sector assets and 18 percent of 
all assets in the financial system, it is the least 
innovative in the sector.  Until recently, the GoG has been 
reluctant to privatize its ownership share in GCB, and too 
often uses GCB to fund questionable government programs, 
including petroleum subsidies.  Recently, the GoG has 
considered seriously floating GCB shares on the Ghana Stock 
Exchange, which would dilute the GoG's ownership percentage, 
and, hopefully, reinvigorate the bank. 
 
Ghana's Insurance Industry is Perking up 
---------------------------------------- 
13. (SBU) The insurance sector is growing in Ghana, but has 
been hindered by the poor reputation and quality of the 
government-owned State Insurance Company (SIC).  SIC's market 
share has steadily declined (from about 90 to 45 percent) as 
the number and quality of private insurers has increased. 
The GoG has drafted a new insurance bill that will end SIC's 
monopoly on providing insurance to state employees. 
Inflation is the biggest enemy of the insurance business, so 
if the macroeconomic environment remains predictable and less 
volatile, the sector should continue to grow.  This would be 
good news for Ghana's economy, since insurance companies are 
often the largest sources of domestic investment. 
 
Constraints on Growth 
--------------------- 
14. (SBU) Lower rates alone are not a cure all for Ghana's 
financial sector.  Savings rates in Ghana are low, so there 
is a small deposit base.  The GoG's Long-Term Savings Bill -- 
currently before Parliament -- aims to remedy this by 
providing incentives for savers.  The credit culture in Ghana 
is weak, with many inexperienced borrowers who simply do not 
intend to repay their loans.  There is also a history of 
borrowers abandoning bad loans at one bank, only to open a 
new account at a different bank where again the loans go 
unpaid.  The Ghanaian bankers association is working to 
establish a credit reference bureau so that new clients can 
be checked. 
 
Comment 
------- 
15. (SBU) In Ghana, macroeconomic stability is slowly working 
its way through the economy and is beginning to impact the 
financial system.  Vast improvements in asset quality and 
private sector growth (through greater access to investment 
capital) will not come over night, but the trend is positive. 
 Individual banks are already beginning to feel, or at least 
worry about, lower profits from debts assets and increased 
competition for good loan clients.  If the downward trends in 
inflation and interest rates continue over the next two to 
three years, Ghana could experience a wave of mergers, 
buy-outs and possibly bank failures.  End Comment. 
YATES