Will Ghana’s financial sector clean-up build a stronger banking system?

The Ghanaian authorities have continued their efforts to clean up the country’s financial sector following a fresh round of financial institution closures.

In mid-August the Bank of Ghana (BoG) announced it had revoked the licences of 23 savings and loans companies, citing their continued insolvency despite government attempts to encourage recapitalisation.

The BoG also revoked the licences of two non-bank financial institutions, Express Funds International and Ghana Leasing, which have been insolvent and inactive for a number of years.

The closure of insolvent institutions is the latest effort to restore confidence in the banking and financial services sector.

The BoG’s clean-up began in August 2017, when a review found that many savings and loans companies and finance houses had low levels of capital, engaged in excessive risk-taking, and had used depositors’ funds to finance personal or private projects.

Since then, the central bank has revoked the licences of around 420 institutions, ranging from universal banks and microfinance corporations, to finance houses and other non-bank financial institutions.

Other sector stability measures

In addition to shutting down undercapitalised entities, the BoG has implemented a series of measures designed to stabilise the sector and address longstanding structural issues.

In September 2017 it raised the minimum capital requirement for commercial banks from GHS120m ($21.9m) to GHS400m ($72.8m), giving institutions until the end of 2018 to meet the new threshold.

Then, in late August this year, officials from the Securities and Exchange Commission told international media that the agency planned to increase the minimum capital requirement for fund managers 20-fold, from GHS100,000 ($18,200) to GHS2m ($364,200).

The change is expected to be implemented by the end of the year, and banks and other lenders will be have to be fully compliant by December 2020.

Broader impacts

While the clean-up seeks to address longstanding structural weaknesses, there are concerns that the recent actions could lead to challenges in the short to medium term.

In particular, the collapse and closure of smaller financial institutions could have an impact on small business growth.

Of the estimated 420 institutions closed by the BoG since September 2017, 347 were microfinance companies and 39 microcredit firms – key sources of funding for entrepreneurs and small and medium-sized enterprises (SMEs).

“The level of economic activity generated in Ghana by non-bank financial institutions – namely, savings and loans companies, microfinance firms and finance houses – cannot be overemphasised,” Barnabas Attipoe, founder and chief investment officer of Africa Trust Capital, told OBG.

“Many individuals and micro-SMEs, such as traders and contractors, feel that they cannot access bank loans because they are perceived to be inherently risky by the banks. Now, with many smaller institutions gone, it might take three or four years for a recovery in credit and activity, especially for the SME sector.”

Concerns have also been raised over the ability of the closed institutions to reimburse their investors.

International media estimate that as many as 70,000 people with combined investments of US$1.6bn could be affected by the closures.

Officials from the BoG have said that, despite concerns, they are pressing ahead with reforms.