Ghana’s financial services and capital market in 2022
Cynthia Quarcoo, Kwabena Oppong-Kyekyeku, and Nhyiraba Yaw Sompa Okyere of CQ Legal discuss the state of Ghana’s economy in the wake of Covid-19, and opportunities for future development
Since the days of the Sir David Barbour Committee, which tried to find legal and administrative solutions to encourage the use of coin, diminish barter and promote exchange in 1906, Ghana has seen significant evolution in its financial sector. From the constitution of the West African Currency Board in 1912 to the creation of the modern-day Bank of Ghana, the country’s financial services and capital markets have undergone complex development.
Here we explore the state of Ghana’s financial services and capital market, emphasising the evolution of the financial sector as well as the impact of Covid-19 on the economy, as well as providing insights for the future of financial services and capital markets.
Financial sector reform before Covid-19
In the period leading up to the pandemic in 2020, Ghana’s financial services had seen significant boundary-shifting regulations and regulatory enforcement.
This started with the enactment of the Bank and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), the current principal law guiding the business of banking in Ghana. Act 930 repealed the Banking Act 2004 (Act 673) and the Banking (Amendment) Act 2007 (Act 738).
Shortly after the implementation of Act 930, the Bank of Ghana appointed a receiver in 2017 to liquidate two major Ghanaian Banks, transferring some of the assets and liabilities to the state-controlled bank, GCB (formerly the Ghana Commercial Bank), through a purchase and assumption agreement.
In March 2020, the Ghanaian economy was recovering from a financial services crisis
Within a year of the liquidation of UT Bank and Capital Bank, the Bank of Ghana revoked the licenses of five other banks and merged them into a single entity, a newly formed bridge bank called the Consolidated Bank Ghana (CBG). CBG was formed from the liquidation of Beige Bank, Sovereign Bank, Construction Bank, UniBank and Royal Bank.
In September 2017, the Bank of Ghana announced that the minimum capital requirement was to increase from GHS 120 million ($15.2 million) to GHS 400 million, enforceable by December 2018. Following the recapitalisation exercise that ended on December 31 2018, the total number of banks in Ghana fell from 34 at the beginning of 2017 to 23.
However, of the 23 banks only 16 had met the new minimum paid-up capital of GHS 400 million. The central bank approved three applications for mergers and formed the Ghana Amalgamated Trust Limited, which saved five other banks from liquidation.
These landmark changes did not only happen in the universal banking space. The licenses of 23 savings and loans companies and finance house companies, as well as 347 microfinance institutions, were also revoked in mid 2019 for insolvency issues and/or lack of operations.
The capital market was not spared as 53 fund management companies also had their licences revoked by the Security and Exchange Commission (SEC) in November 2019. The estimated cost of the financial services clean-up is about GHS 21 billion (about 6% of GDP).
Two principal legal instruments introduced during these banking sector reforms were the Capital Requirements Directive (CRD) issued under Section 92(1) of the Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930) and the Corporate Governance Directive.
The Corporate Governance Directive was issued with these central objectives:
To require regulated financial institutions to adopt sound corporate governance principles and best practices to enable them to perform their role in enhancing economic growth in Ghana;
To promote and maintain public trust and confidence in regulated financial institutions by prescribing sound corporate governance standards critical to the proper functioning of the banking sector and the economy as a whole; and
To minimise the possibility of regulated financial institution failures that are usually rooted in poor corporate governance practices.
The CRD consisted of four parts:
Definition of regulatory capital;
Management and measurement of credit risk with three sub-sections;
Management and measurement of operational risk; and
Management and measurement of market risk.
The CRD sets the requirements by which banks calculate the capital adequacy ratio (CAR) under the Bank and Specialised Deposit Taking Institutions Act. The risk-based CAR requires banks to hold appropriate capital commensurate to unexpected losses that may arise from business through capital transactions, credit, operational and market risks.
It is against this backdrop and on the brink of the recovery process that Covid-19 hit Ghana in the first quarter of 2020.
Covid-19 and the financial services sector
At the end of March 2020, when Ghana implemented a lockdown in two of its major cities, it was obvious that the economy would experience significant shocks. The developing Ghanaian economy is significantly informal and was recovering from a financial services crisis. It was clear that the necessary total and partial lockdowns would likely hurt businesses in the short to medium term.
Employees were likely to be laid off and financial hardship was imminent. Businesses in sectors like tourism that depended on travel, outdoor activities and events suffered significant revenue losses. Financial services companies that had exposure to these industries were bound to experience increased non-performing loans.
Over the medium term, Ghana’s GDP is projected to grow by an average of 5.6%
The effect of the pandemic was that Ghana’s GDP growth declined from 6.5% in 2019 to 0.41% in 2020. Yet the year 2021 saw real GDP growth registering a positive 5.4%.
One of the earliest interventions by the Bank of Ghana during the pandemic was a directive to suspend the distribution of dividends for the financial years 2019 and 2020. The policy objective was to ensure that banks and specialised deposit-taking institutions (SDIs) were better able to support their customers throughout the Covid-19 pandemic and to absorb any potential operational losses.
The Bank of Ghana also published ‘Guidance on the Utilisation of Capital and Liquidity’ with measures to contain the impact of Covid-19 on the Ghanaian economy. The four main policy interventions were:
The reduction of the primary reserve requirement from 10% to 8% to provide more liquidity to banks and SDIs to support critical sectors of the economy;
The reduction of the capital conservation buffer for banks from 3% to 1.5% to provide the needed financial support to the economy;
The reduction of provisions for loans in the ‘Other Loans Especially Mentioned’ category from 10% to 5% for all banks and SDIs as a policy response to loans that may experience difficulty in repayments due to the slowdown in economic activity; and
Loan repayments that are past due for microfinance institutions for up to 30 days should be considered as ‘current’ as is the case for all other SDIs.
The central bank also intervened to nudge consumers toward electronic money usage. The Bank of Ghana agreed with banks and mobile money operators on measures to facilitate more efficient payments and promote digital forms of payments. These interventions were:
All mobile money users could send up to GHS 100 for free (excluding cash out). This included sending money to a recipient on the same network or another network via the interoperability platform;
All mobile phone subscribers were permitted to use their existing mobile phone registration details to be on-boarded for a Minimum KYC Account;
Revising upward the transaction limits for mobile money transactions;
Increasing the wallet limits for holding electronic cash; and
Revising the aggregate monthly transaction limits.
As a result, registered e-money accounts increased from 32,470,793 in 2019 to 38,473,734 in 2020. The total value of transactions also increased from GHS 309.4 billion in 2019 to GHS 564.2 billion in 2020. The total value of mobile money transactions in 2021 is estimated at GHS 953.2 billion, which represents significant growth over the previous year.
However, in the 2022 budget read in 2021, the government indicated its intent to pass an electronic levy, which it subsequently enacted in 2022. The E-Levy Act, 2022 (Act 1075) means that a 1.5% levy would apply to money transfers above GHS 100 within the same mobile money (MOMO) network, across different networks, from bank accounts to MOMO and vice versa, as well as bank transfers on a digital platform or application that originate from a bank account belonging to an individual to another individual.
Initial analysis seems to suggest that the levy may limit the growth of the mobile money value chain and may reduce the total value of transactions, but the policy effect is yet to be seen as the implementation of the policy started on May 1 2022.
Outlook for financial services
Ghana’s financial services sector has many opportunities for growth given that the country hosts the secretariat of the African Free Trade Continental Area (AfCFTA), but it must first attempt to improve consumer confidence. The AfCFTA presents a clear opportunity to bring together all the 55 member states of the African Union, covering a market of more than 1.2 billion people and an estimated GDP of more than $3.4 trillion.
We anticipate the evolution of banking in Ghana will lead to the growth of alternatives to the short-term debt that is the common model for financing in the country. The new financial services landscape will see banks diversifying into equity, hedge funds, crowd funding, accelerator and incubation programmes.
Long-term and wholesale financing presents significant opportunities for the future with the passage of the Development Finance Institutions Act, 2020 (Act 1032). Financial services education also presents considerable opportunities for the future.
Ghana’s capital market
In Ghana, the SEC, the Bank of Ghana, the Ghana Stock Exchange (GSE), the Ministry of Finance and Economic Planning and stock brokerage firms form the bedrock of market regulation, management and operations.
Ghana’s capital market, before the pandemic, was beginning to play a pivotal role in attracting long-term capital financing for economic activities. However, Covid-19 intensified uncertainties in international financial markets, causing a downturn in bond prices. This widened the spread on sovereign bonds, especially in emerging markets such as Ghana.
Most emerging market sovereign issuers like Ghana were downgraded by the major ratings agencies in the wake of the pandemic, reflecting strained budget conditions and weaker economic outlooks. The credit rating agency Fitch revised its outlook for Ghana’s long-term foreign currency issuer default rating (IDR) to negative from stable and affirmed the IDR at ‘B’.
Ghana witnessed some exits in its bond markets, leading to sharp increases in yields as investors revised their risk-off sentiment and shifted to safer assets such as gold. However, demand for government bonds was sustained by local investors, including asset managers and banks, as they focused on safer and more liquid assets.
The disruptions extended to corporate bonds and a shutdown of new issuance as investors reassessed their risk appetites and corporate institutions shied away from the market due to wider credit spreads. The market returned to relative normality in 2021 with the re-emergence of offshore investors and corporate issuance.
In Ghana, the momentum for local bond issuance in the local debt capital markets did not slow down entirely in 2020, according to data from the Central Securities Depository. The total debt securities issued in the capital markets for full year 2020 had a value of GHS 207 billion, representing a 43% increase over the previous year.
This performance was mainly driven by a series of bond issues from the government, quasi-government institutions and financial institutions. Key investors including banks, pension funds, asset managers, real money accounts and high net-worth individuals elected to pack more money into government securities and issuance from government-related institutions as their sentiment on the real economy began to turn negative. Despite the global headwinds, the local debt capital market remained poised and continues to demonstrate strong potential for growth.
As of March 2022, the Ghana Stock Exchange, the country’s principal exchange has 29 listings, offering ownership in four different variations of equity. These are ordinary shares, depository shares, preference shares and exchange-traded funds.
In Ghana, there is also the Ghana Alternative Market (GAX), a parallel market operated by the GSE, which was established in 2013. The platform was intended for start-ups and small and medium-sized enterprises to raise capital. The GAX has six listings as at March 2022.
Ghana ranked fourth out of 23 countries on Absa’s Africa Financial Markets Index in 2021, created by the Official Monetary and Financial Institutions Forum, an independent think tank for central banking, economic policy and public investment, in association with Absa Group Limited.
This was a marked improvement from its 2019 ranking of 13th place and two positions higher than in 2020. Absa cited Ghana’s strong contractual framework but notes that pension assets per capita remain relatively low.
Economic recovery plans
The government of Ghana received approval from parliament to raise $3 billion from international capital markets with an option to raise a further $2 billion based on favourable market conditions in 2021. To date, the government has raised $3.025 billion in Eurobond financing, which occurred in March 2021.
In July 2021, Ghana announced that it was considering issuing a $2 billion social and green bond – the first such offering in Africa. The proceeds of the offer would finance social initiatives, such as the free secondary school programme that was implemented in 2017, as well as refinancing existing debt for projects related to the environment and social development. Even though the issuance was not successful in the second half of 2021, issuing social and green bonds has become increasingly popular with governments around the world since the start of the Covid-19 pandemic.
While Ghana’s capital markets ecosystem has grown in recent decades, the SEC is working to increase both its depth and breadth by attracting investment and new entrants, as well as by further diversifying offerings. In May 2021, the SEC launched the Capital Market Master Plan 2020-29 (CMMP), the government’s first long-term development programme for the sector.
The CMMP features four pillars:
Improving the diversity of investment products and the liquidity of the securities market;
Widening the investor base;
Strengthening capital market infrastructure and improving service provision; and
Improving regulations, enforcement and market confidence.
At the end of the period, the plan aims to have turned Ghana into an established emerging capital market with a wide range of investment opportunities to facilitate the mobilisation of resources and support the country’s financial stability.
The CMMP is divided into three phases: 2020 to 2022, 2023 to 2025 and 2026 to 2029. The measurement of key performance indicators (KPIs) is set for 2024 and 2029.
The KPIs include increasing the amount raised annually via equity from a baseline of GHS 2 billion in 2018 to GHS 6 billion in 2024 and GHS 15.2 billion in 2029. This will also be achieved via bonds increasing from GHS 20.9 billion to GHS 40 billion and GHS 52 billion over the same periods.
The plan also targets increasing market capitalisation as a share of GDP from 20.3% in 2018 to 50% in 2029.
The SEC hopes that the programme will help capital markets become one of the main channels for financing innovation and entrepreneurship. This is especially important because small-scale and start-up enterprises often have difficulties connecting to opportunities in the capital markets.
Support from the World Bank Group
According to the 2022 government budget and economic policy, Ghana’s total revenue for 2022 is projected at GHS 100 billion compared to a revised revenue budget of GHS 72 billion in 2021 representing a 39% increase in projected revenue and a 43% increase in 2021 projected outturn.
The projected revenue increase in 2022 is expected to be largely driven by government’s introduction of a 1.5% electronic transaction levy on mobile money payments, bank transfers, merchant payments and inward remittances.
The World Bank Group has also launched a new five-year Country Partnership Framework (CPF) for Ghana for 2022 to 2026. The CPF prioritizes investments in human capital, job creation, economic diversification, building a resilient health system and fostering a greener and more inclusive society. The CPF will support Ghana in its Covid-19 and medium-term development agenda.
The CPF is designed around three mutually reinforcing focus areas:
Enhancing conditions for private-sector development and quality job creation;
Improving inclusive service delivery; and
Promoting resilient and sustainable development.
The $4.5 billion CPF was prepared jointly by the World Bank, the International Finance Corporation and the Multilateral Investment Guarantee Agency.
Over the medium term, covering the period 2022 to 2025, Ghana’s real GDP is projected by the ministry of finance to grow by an average of 5.6% – with yearly growth rates of about 5.8%, 5.4%, 5.3% and 6.0% in 2022, 2023, 2024 and 2025, respectively. With the projected increase in GDP, the corresponding growth in the financial services industry cannot be underestimated.
Furthermore, as we witness the full maturity of the Payment Systems and Services Act, 2019 (Act 987), we expect to see further growth and increased development in the financial technology industry in Ghana.
Ghana’s capital market is also expected to see an upwards trend after the pandemic and will gradually play a pivotal role in attracting both long-term and short-term capital financing for economic activities. Also, the various economic recovery plans being implemented by the government provide the opportunity for businesses and investors to make substantial returns on their investment.
Investors are therefore encouraged to appreciate the nature of Ghana’s investment landscape as a viable vehicle for portfolio investment and funding.