Ghana Final

7/31/2019 Ghana Final

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Ghana

NANA WARE NANA BEDUADDO ABIMBOLA SALAMI


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Introduction:

This paper provides a detailed and comprehensive analysis of the financial system of Ghana. The paper covers the role of the government, central bank and other regulatory bodies in the financial systems.

With the regards to the government, the paper provides a comprehensive review of the macro economic and political environment of Ghana (10 year macro economic data and forecast provided). It also analyzes the borrowing of the Ghanaian government in the internal and the external markets to carry out economic development. In addition it also covers various regulations for different sections of the financial market.

The paper considers the integral role played by the Bank of Ghana (BoG) in the economy. BoG is responsible for monetary policy of the country and also assists the Ministry of Finance to ensure economic stability. To this end it manages interest rates, inflation as well as exchange rates. The central bank is also responsible for the regulation and supervision of the Ghanaian banking system as well as other non banking financial institutions. The paper provides information on the banking system with regards to ownership, capitalization profitability, level of credit etc.

Expanding beyond the role of the government and the Central Bank, the paper covers the Insurance, Stock and Bond markets. The coverage extends to the regulation, performance and expectations for these markets.

Finally, the paper takes a brief look at other types of financial markets, other types of financing (PE, Micro Finance, etc.), Ghanas bankruptcy Code and Capital Control.

POLITICS:

Ghana is a beacon of stability in the West African sub region. Since 1981, Ghana has enjoyed peace and political stability in a turbulent region, and in 1992 the country ushered in the Forth Republican constitution with the organization of the 1992 democratic election. The countrys multiparty democracy, which began in the early 1990s, is well entrenched. The National Democratic Congress (NDC), the ruling party and the New Patriotic Party (NPP) dominate the political scene. The NDC took over power from the NPP in the 2008 elections after losing power in the 2000 elections. The December 2008 elections, the countrys fourth presidential and parliamentary elections under the Fourth Republican Constitution saw a smooth transition from one government to another. Analyst of Ghana see limited risk of


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political social disorder impacting the economy. Given the economic accomplishments in recent years and the countrys reliance on donor support, little institutional or economic change is anticipated no matter which party is in power.

ECONOMICS:

On the economic front, Ghana has done really well compared to other developing economies and the country has enjoyed macroeconomic stability for over a decade. For a net oil importing country, Ghana has lived up to its standard and performed particularly well over the past two years. GDP is estimated to have grown by 6% in 2006, reflecting mainly a record year for cocoa production and high international prices for gold. In 2007, despite severe energy shortages and high international crude oil prices, the economy maintained a solid growth rate of 6.2%. Ghanas firm growth of above 5% over the past two decades is well above Africas average and has resulted in one of the fastest rates of poverty reduction in Africa. Increased government expenditure on poverty reduction activities and the implementation of coherent and comprehensive policies have reduced poverty significantly. Results from the Ghana Living Standards Survey (GLSS5) published in April 2007 show a downward trend in poverty from 51% in the 1990s to 28.5% in 2005/06. Poverty related expenditures increased from GHc233.9 million in 2002 to GDc1 237.5 million in 2006, representing 21.7% and 35% respectively of total government expenditure.

Significant expenditures have also been made by the government to improve the generation, transmission and distribution of electricity. A number of short, medium and long term interventions targeted at resolving the energy crises that besieged the country in the latter part of 2006 and 2007 were pursued in 2007. Significant among them is the successful negotiation of the US$622 million loan for the construction of the Bui Dam and Bui City. The investment is the second largest single investment in the history of the country after Akosombo Dam and one of Africas largest hydropower projects. It also includes construction of 100km transmission lines.

Another unparalleled achievement is the successful entry of Ghana into the Eurobond market. The government listed a 10year Eurobond on the London Stock Exchange in September 2007. The bond, which was scheduled to raise US$750 million, booked almost US$3 billion a clear demonstration of investors confidence in the economy. About 40% of the bond was placed with US investors, 36% with UK investors, with the remainder going to the rest of Europe.


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Although Ghanas economy have been able to withstand the global economic slide and increase in food and energy prices, if the surge in global economic crisis dont recede in the short term, it can wipe away the economic gains that Ghana has made the past decade. A big chunk of Ghanas GDP comes from remittances from Ghanaians abroad and this has slowed down significantly due to the global economic challenges. Already, the governments policy to reduce inflation to single digits is not achievable since inflation is on the upward swing due to increase government spending on food and energy.

With the country poised for accelerated growth, a massive infusion of capital is required to undertake the necessary infrastructure to facilitate such growth. The discovery of oil in commercially significant quantities could therefore not have come at a more opportune time. Production of oil is expected to come on line in 2010 and represents a further spur to growth levels.

History: Ghana was the first port of call in sub Saharan Africa when the Europeans arrived to

trade first in gold, later in slaves. It was also the first black African nation in the sub Sahara Africa to achieve independence from Britain on March 6, 1957. The modern country Ghana was formed from the merger of the British colony of the Gold Coast and the British Togoland trust territory (UN protectorate).

Population:

According to the 2008 UN estimate, Ghanas population stands at 23.9 million (UN, 2008). The ethnic composition of Ghana are Akans 45.3%, Mole Dagbon 15.2%, Ewe 11.7%, GaDangme 7.3%, Guan 4%, Gurma 3.6%, Grusi 2.6%, Mande Busanga 1%, other tribes 1.4%, and other 7.8% (Ghana 2000 census).

The breakdown of the languages spoken by the population are Asante 14.8%, Ewe 12.7%, Fante 9.9%, Bron (Brong) 4.6%, Dagomba 4.3%, Dangme 4.3%, Dagarte (Dagaba) 3.7%, Akyem 3.4%, Ga 3.4%, Akuapem 2.9%, other 36.1% (includes English the official language) (Ghana 2000

census).

And lastly, the religious make up of the population are Christian 68.8% (Pentecostal/Charismatic 24.1%, Protestant 18.6%, Catholic 15.1%, other 11%), Muslim 15.9%, traditional 8.5%, other 0.7%, none 6.1% (Ghana 2000 census).


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Important Industries: The most important industries for Ghana are Agriculture which employs about 60% of

the population followed by Cocoa, Gold, timber, tuna, bauxite, aluminum, manganese ore, diamonds, light manufacturing, and food processing.

With the discovery of oil in commercial quantities and with production starting in late 2010, oil and gas will become a major and important industry within the Ghanaian economy.

Agriculture accounts for about 50% of GDP (including fishing and forestry); the major cash crop is cocoa; other principal crops are rice, coffee, cassava, peanuts, corn, Shea nuts, and timber; Ghana is normally self sufficient in food.

The distributions of labor force by industry are: agriculture 60%, industry 15%, and services 25% (2005 BoG est.)

Macroeconomic Data:

Below is the comprehensive macro economic data for Ghana from 2002 to 2011 by courtesy of BMI. Also, see the macro economic data spreadsheet for Ghanas economic activity from BMI and IMF IFS systems for more macro economic data.

Ghana Macro Economic Data Q2 2009

2002 2003 2004 2005 2006 2007 2008 2009f 20Population, mn [5] 20.8 21.2 21.7 22.1 23.00 23.50 23.90 24.50 2

Nominal GDP, US$bn [6] 6.2 7.5 8.8 10.7 12.90 14.63 14.34 14.73 2

GDP per

capita,

US$

[6]

297

352 407 483 557 623

598.00 601

eal GDP growth, % change yoy [7] 4.5 5.2 5.6 5.9 6.4 6.2 6.40 5.1 S nominal growth, % change yoy [7] n/a n/a n/a n/a 21.70 18.00 20.90 24.70 1

Inflation rate, % 38.00 23.00 22.00 20.00 18.00 15.00 14.30 18.23 2Unemployment rate, % 18.00 17.10 18.23 20.30 18.95 24.37 23.01 25.00 2

Budget balance, GHSbn [7] 0.3 0.4 0.2 0.6 0.4 0.7 2.50 1.8


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Budget balance, % of GDP [6] 6.2 3.3 3.1 6.2 3.5 5.1 14.90 8.6

sumer Price Index (CPI), % yoy, ave [1,8]

14.8 26.7 12.6 15.1 11.0 10.7 16.50 14.9

Consumer prices, % yoy, eop [7] 16.9 18.7 11.8 14.8 10.5 12.8 18.10 10.0

91day Tbill rate, %, eop [1] 25.1 27.2 16.6 14.9 10.0 9.0 8.50 8.0 Bank rate, eop [1] 24.5 21.5 18.5 15.5 12.5 11.5 11.00 10.0

Exchange rate GHS/US$, ave [9] 0.84 0.89 0.91 0.91 0.92 0.93 1.08 1.43 1Exchange rate GHS/US$, eop [9] 0.87 0.91 0.9 0.91 0.92 0.95 1.26 1.60 1Exchange rate GHS/EUR, eop [9] 1.06 1.23 1.23 1.08 1.22 1.39 1.77 2.03 1Central bank policy rate, % [1,7] 24.5 21.5 18.5 15.5 12.5 13.5 17.00 17.00 1

Exports, US$bn [7] 2.00 0.3 2.7 2.8 3.73 4.19 5.97 5.69 5Exports, % change yoy [6] 24.3 19.91 36.03 28.73 33.0 12.6 42.30 4.7

Imports, US$bn

[7]

2.70

3.20 4.30 5.35 6.75 8.07

10.47 8.95 9Imports, % change yoy [6] 28.01 27.44 19.78 23.70 26.30 19.50 29.70 14.5 3

Trade balance, US$bn [6] 0.70 3.00 1.60 2.50 3.03 3.88 4.50 3.26

Current account, US$bn [2,7] 0.20 0.30 0.32 0.77 0.81 1.88 3.04 2.04

Current account, % of GDP [2,6] 4.30 4.04 3.56 7.21 6.30 12.60 19.39 13.19 1reign reserves ex gold, US$bn [3,8] 0.54 1.35 1.63 1.75 2.09 2.24 2.00 1.96 2Import cover, months g&s [4,10] 2.40 5.10 3.60 3.20 3.00 2.70 1.90 2.1

tal external debt stock, US$mn [11] 5139.7 3993 3519 3033.3 3192.2 3586.70 4382.10 4560.1 47al external debt stock, % of GDP [12] 40.01 32.9 28.23 22.19 24.73 23.97 27.94 31.01 3

al external debt stock % of XGS [12] 59.12 48.91 53.89 55.56 62.31 59.34 55.77 59.90 6ort term debt as a % of International

reserves [12] 45.91 22.09 25.78 32.45 54.67 8.00 17.53 18.58 1

ort term foreign debt, % of total [12] 18.91 14.09 21.77 20.96 35.80 5.00 8.00 8.00 1

Notes:

1] IMF data 1990 2002, BoG data thereafter

[2] Including official transfers

IMF data

1990

2006,

Bank

of

Ghana

thereafter

For reserves, IMF data 1999 2006, Bank of Ghana thereafter

Sources:

[5] IMF


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The Banking System:

Overview of the Banking Industry

The banking sector in Ghana presents compelling opportunities for growth and development, fueled by key reforms to rules and regulations which have in turn, encouraged new entrants to the sector and fuelled intense competition within the industry. The depth of importance of the sector to the economy cannot be underestimated in 2000 the Asset to GDP ratio stood at 43.6 percent and by the end of 2008, the ratio had scaled upwards to 65.6 percent. Over the same period (2000 2008), credit availability to the Private Sector saw a considerable expansion to 30 percent of GDP from 13 percent in 2000. Increasing banking competition has led to an extraordinary growth in branch network, (increased by 63% in the last two years) leading to growths in deposits, which increased by 41% in 2008, albeit, down from the 45% recorded in 2007.

Net Interest Income for the industry has more than doubled over the five years to 2008 by 123%, while Net Profit for the industry has increased by approximately 120% over the same period. Industry Net Profit Margin however has remained constant at 24.1% since 2003, while industry Return on Equity (ROE) decreased from 34.8% in 2003 to 26.5% in 2007. Return on Assets (ROA) dropped from 3.94% in 2003 to 2.9% in 2007, which is indicative of the increasing competitive nature of the Ghana banking industry.

6] Bank of Ghana/BMI calculation

[7] Bank of Ghana

[8] IMF/Bank of Ghana

[9] BMI

IMF/Bank of

Ghana/BMI

calculation

[11] World Bank GDF

2] World Bank GDF/BMI calculation


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Selected Indicators of the Banking Industry Dec00 Dec06 Dec07 Dec08 Balance Sheet of Banking Industry Dec07 Dec08 Dec07 Dec08Bank Branches 391 596 639 Year on Year Growth (%)

Market Share (Top 5 banks) 65.6% 57.4% 55.6% 51.9% TOTAL ASSETS 7,796 10,692 50.4% 37

Assets to GDP 44% 45% 56% 66% A. Foreign Assets 632 979 27.3% 54.Private Sector Credit / GDP 13% 21% 30% B. Domestic Assets 7,164 9,713 52.8% 35Total Credit to GDP 19% 22% 30% 37% Investments 1,372 1,548 13.6% 12.Deposits to GDP 27% 30% 35% 43% i. Billls 470 993 0.8% 111.3

ii. Securities 883 530 24.8% 40.0Advances (Net) 3,919 5,594 67.9% 42

Income Statement Highlights Dec07 Dec08 Dec07 Dec08 Gross Advances 4,146 5,967 64.6% 43Year on Year Growth (%) Other Assets 442 507 64.3% 14

Interest Income 772.1 1185.2 37.5% 53.5% Fixed Assets 242 345 51.5% 42

Interest Expenes (269.5) (481.5) 73.3% 78.7% TOTAL LIABILITIES and CAPITAL 7,796 10,692 50.4% 3Net Interest Income 502 .6 703.7 23.7% 40.0% Total Deposits 4,914 6,949 45.3% 41Fees and Commissions (Net) 234.7 303.1 44.8% 29.1% Total Borrowings 1,050 1,360 78.9% 29Other Inome 83.1 215.8 36.0% 159.7% Foreign Liabilities 667 906 12.6% 35Operating Income 820.4 1,222.6 30.3% 49.0% i. Shortterm borrowings 335 342 583.5% 2Operating Expenses (461.9) (736.3) 32.0% 59.4% ii. Longterm borrowings 233 372 52.4% 59

Staff Cost (180.0) (303.4) 8.0% 68.6% iii. Deposits of nonresidents 99 192 5.4% 93.other operating expenses (281.9) (432.9) 53.8% 53.6% Domestic Liabilities 6,295 8,591 47.4% 36

Net Operating Income 358 .5 486.2 28.2% 35.6% i. Shortterm borrowings 353 548 27.3% 55Total Provision (Loan losses, Depreciation & others) (114.3) (188.1) 78.3% 64.6% ii. Longterm borrowings 130 98 19.8% 24.6Monetary Loss 1.0 3.2 iii. Domestic Deposits 4,815 6,757 46.4% 40Income Before Tax 245 .2 301.3 13.8% 22.9% Other Liabilities 955 1,263 72.4% 32Tax (68.3) (74.1) 3.2% 8.5% Paidup capital 279 446 32.8% 59.Net Income 176.9 227 .3 18.5% 28.5% Shareholders' Funds 806 1,113 32.8% 38.

GH million

GH million

BANKING OVERVIEW

The consolidated balance sheet of the banking industry over the year 2008 expanded by 37.2% to GH10.7billion, from the GH7.8billion recorded in 2007. The continuous growth of industry total assets was driven principally, by credit expansions and growth in the number of banks. As of December 2008 loans and advances outstanding, stood at GH5.6billion, a 42.7% year on year growth, even if down on the 67.9% growth recorded a year earlier in 2007. Banks investments in government paper amounted to GH1,547.9 million in December 2008. An annual growth of 12.8 per cent over the year, compared to the 13.6 per cent growth recorded in the 12month period to December 2007.

The banking systems Foreign assets rose by 54.9 per cent over the year to GH978.8

million compared

to

the

27.3

per

cent

growth

recorded

during

the

same

period

in

2007.

The

growth in the banking industry asset size was funded mainly by deposits, which rose by 41.4 per cent over the year to GH6,949.0 million, compared to the 45.3 per cent growth recorded for year to December 2007. Growth in Total Borrowings however, slowed markedly to 29.5 per cent at the end of December 2008 to GH1,360.0 million compared to a 78.9 per cent growth in the year to December 2007. Shareholders funds rose by 38.1 per cent to GH 1,112.8million


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over the year compared to 32.8 per cent growth in the corresponding period to December 2007.

The share of deposit funds in the overall liabilities of the banking sector was 65 per cent

up from

the

63

per

cent

share

over

the

same

period.

On

the

other

hand,

the

share

of

total

borrowings declined 0.8 percentage points to 12.7 per cent over the same period. The share of shareholders funds in overall liabilities remained at 10.4 per cent over the same period indicating that 10.4 per cent of the banking sector assets are backed by equity.

The increasing share of deposits in banks liabilities coupled with the decline in the share of total borrowings is good for the profitability of the banking industry considering that deposits are a cheaper source of funds compared to borrowing.

Going forward, banks ability to spot and manage high risk and high returns opportunities, effectively control costs, and introduce real differentiation in products and services would be

key to

their

growth

and

profitability.

Structure of the Banking Industry The Ghanaian banking industry can be split into 3 distinct areas. Namely: Commercial/Universal Banks, the Central Bank and Rural/Community Banks.

Banks:

There are 25 registered banks in Ghana as at 2009 with the minimum capitalization expected to total over GH935 million by the end of 2009. The central bank Bank of Ghanas (BOG), new regulation requires banks operating in the country to have a stated capital of not less than GH60 million. For new banks entering the market, this would be a condition for the issuance of an operating license. For others already established, the BOG timeline is end of 2009 for banks with majority foreign shareholding (foreign banks); and the end of 2012 for banks with majority Ghanaian shareholding (local banks).

Bank capital in Ghana or shareholders funds comprises stated capital, income reserves, statutory reserves, and capital reserves. In 2003, BOG issued a directive requiring all banks to increase stated capital to GH7million (equivalent of 70billion old cedi) by the end of 2006. This was a to encourage the operating banks at the time, acquire universal banking licenses that

allowed them to undertake retail , merchant , development, and/or investment banking activities without the need to acquire separate licenses. All banks in operation at the time complied with this BOG directive before the deadline. The majority of banks raised the additional capital required through transfers from retained earnings and income surpluses. In the process, the industrys stated capital was increased from GH29million (2003) to GH181million (2007), i.e. by more than five times levels in 2003. A key result of compliance with this directive was that bank lending increased from GH1.055billion (2003) to


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GH2.464billion (2007), representing a 66% increase in one year. Prior to 2007, industry net loans and advances had been growing at a simple average of 32% between 2003 and 2006. A similar result is expected from the recent directive.

With new capital regulations set to come into force, Banking Analysts are forecasting

difficulties

ahead

in

raising

the

necessary

capital,

given

current

tightening

global

market

conditions. Against this backdrop, analysts suggest some degree of market consolidation as likely as the more strongly capitalized banks scramble for weaker banks.

However, BOG has intimated that consolidation in the industry is not the principal objective of this new requirement. Instead, the goal is to infuse the industry and the economy with huge volumes of fresh capital, thus making available more liquidity for financing new, high value projects. However, it is acknowledged that such a development could very well lead to the incidence of survival of the fittest in the industry, as weaker banks get eliminated. A downside the BOG acknowledges could reduce the level of competition in the industry, and eliminate some of the benefits enjoyed by industry customers today. Reduced competition may

also signal the emergence of an industry less responsive to market forces. One anticipated benefit of the new capital requirement is the potential deepening of

Ghanas capital markets. But this is very much dependent on the route to re capitalization chosen by the banks. We imagine that if the environment is right, banks might seek to raise some more capital through initial public offerings (IPOs), which would have the knock on benefit of broadening the shareholder base of the banks while further developing the corporate governance landscape. Furthermore, a more robust capital base of the industry would engender confidence in the business and investor communities, and in the general retail banking public.


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[See the embedded file for complete GSE listings and historical stock prices for the listed companies].

Rural Banks

The idea of rural banking was conceived some 32 years ago by the Bank of Ghana with the aim of broadening and deepening financial intermediation in the rural areas. Together with the Ministry of Finance a junior league of banking institutions to serve the special needs of the rural population was established. There are currently 129 Rural banks in the country serving rural communities. The ARB Apex Bank Ltd is the mini Central Bank regulating the Rural/ Community Banks (RCBs).

Functions of ARB Apex Bank:

Provision of cheque clearing services removes the constraints of delays in cheque clearing through the big commercial banks.

Handling cash movement and funds management services. This ensures effective and efficient management of the cash of rural/community banks.

Development of new innovative banking products. This is to enable more rural dwellers to have access to banking products purposely designed to meet their needs.

Capital as at December 2007 and minimum Capital by 2009 (GH000)

Bank OwnershipStatedCapital

Income Surplus

Available Capital

MinimumCapital (2009)

MBG Ghanaian 7,000 21,581 28,581 25,000ADB Ghanaian 20,000 38,685 58,685 25,000GCB Ghanaian 72,000 69,890 141,890 25,000NIB Ghanaian 7,000 16,301 23,301 25,000CAL Ghanaian 8,008 7,709 15,717 25,000TTB Ghanaian 7,000 5,339 12,339 25,000PBL Ghanaian 7,180 1,733 8,913 25,000FAMBL Ghanaian 7,012 1,303 8,315 25,000HFC Ghanaian 7,025 446 7,471 25,000UGL Ghanaian 7,035 146 7,181 25,000Fidelity Ghanaian 7,172 (750) 6,423 25,000BBG NonGhanaian 7,000 49,905 56,905 60,000SCB NonGhanaian 13,131 41,157 54,288 60,000SSB NonGhanaian 7,000 27,309 34,309 60,000EBG NonGhanaian 16,400 7,773 24,173 60,000Stanbic Non Ghanaian 7,322 10,345 17,667 60,000ABL NonGhanaian 7,200 47 7,247 60,000ZBL NonGhanaian 10,838 (3,629) 7,209 60,000Intercont Non Ghanaian 8,991 (2,140) 6,851 60,000ICB NonGhanaian 7,759 (1,083) 6,676 60,000GTB NonGhanaian 10,143 (3,947) 6,196 60,000BPI NonGhanaian 7,630 (1,735) 5,894 60,000Total 259,846 286,385 546,231 935,000


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Provision of inspection services. The provision of both on site and off site inspection services address the problems of inadequate bookkeeping, non observance of internal control measures and lack of regular inspection of the rural/community banks.

Provision of Information Technology support to computerize rural/community banks

operations and

ensure

efficient

handling

of

data/information

which

will

result

in

quality

customer service.

Sourcing of funds for on lending to the rural/community banks. Training of staff and directors of rural/community banks. This ensures that the staff and

the management of rural/community banks possess the requisite skills to operate professionally.

Financial Performance of Rural and Community Banks

PERFOMANCE

INDICATOR

DECEMBER 2006

GH'm

DECEMBER 2007

GHm VARIAINCE (%)

INCREASE/(DECREASE) TOTAL ASSETS 298.75 375.80 25.8

TOTAL ADVANCES 115.10 167.97 45.9

TOTAL INVESTMENTS 84.63 90.75 7.2

TOTAL DEPOSITS 226.46 285.46 26.1

PROFIT BEFORE TAX 8.87 12.51 41.0

PAID

UP CAPITAL

9.35

11.18 19.6

NETWORTH 38.53 47.40 23.0

Deposit Insurance:

Ghana currently does not have a deposit insurance program in place. Rather, the central bank uses Capital Adequacy regulations to ensure the protection of funds deposited at the bank. Till 2006, the capital adequacy program required that Banks keep 9% of their assets in primary reserves of cash lodged at the Bank of Ghana, and a further 35% in secondary reserves of

Government securities and maturities. Primary reserves receive no interest, while secondary reserves receive only the going market rate. The banks pass on the costs of these regulatory constraints on their liquid assets through high lending rates to consumers (borrowers).

In 2006, parliament passed an amendment to the banking act that introduced a new licensing structure. Namely: Class I (domestic banking in the local currency), Class II (banking or


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investment banking in currencies other than the local currency) and General (a combination of Class I and Class II business). It also introduced capital adequacy requirements for the various classes of banks. A bank holding a Class I or General License is required to maintain at all times, while in operation, a minimum capital adequacy ratio of 10%. A bank holding a Class II Banking License must maintain any capital adequacy ratio determined by the Bank of Ghana. This has

resulted in a total drop of capital adequacy requirements by about 15% overall.

But various bodies have called on the government to seriously consider a the use of Deposit Insurance as an alternative mechanism for satisfying at least a part of capital adequacy rules, in order to generate some relief for the more striving banks which would also lower lending rates for the consumers. The biggest obstacle to implementing an explicit deposit insurance scheme, apart from the technical challenges of creating a new sensitive institution from scratch, is the obvious the issue of moral hazard i.e. the notion that an insurance scheme could interfere with traditional restraints and weaken incentives for prudence and caution on the part of depositors and banks alike. The exact technical attributes of any deposit insurance program may influence

what types of hazards emerge.

Interest Spread

The Yield Curve

Strong near term inflation expectations alongside the MPCs policy rate decisions resulted in a

significant re alignment of rates on the auction market. There was thus a rotation and subsequent inversion of the yield curve2 in Q3 2008. The benchmark 91day Treasury bill rate increased marginally by 8 bps in Q4 to 24.66 per cent after a cumulative increase of 13.96 per cent in the year through Q3. The 182 day Treasury bill rate similarly rose by 14 bps in Q4 2008 after cumulatively rising by 15.24 per cent up to Q3. The 1year note and the 2year fixed note however remained unchanged at their end Q3 levels of 20.0 per cent and 21.0 per cent


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respectively, increasing by 770bps and 820bps in the year through Q3. The 1year note and the 2year fixed rate note followed similar patterns (770bps and 820bps respectively), ending at 20 per cent and 21 per cent respectively at end 2008.

As shown in the graph below, commercial lending rates generally fell over the period, very

rapidly initially as competition grew keener with the new entrant of banks from Nigeria. However, a 3% increase in annual average inflation (2004 2005) caused banks to subsequently decrease the pace of drop in their lending rates.

This slackening in banks pace of driving their commercial lending rates down is in spite of BOG continuing its policy of lowering the prime rate in substantial amounts. A key explanation offered by banks is that the industry is still plagued by structural weaknesses that keeps credit risk aloft, such as the absence of credit reference bureau.

The huge gap in 2003 of about 14% has closed considerably to 7%, in the face of increased competition and higher liquidity (resulting from the abolition of the 15% secondary reserves in 2006).

The Credit Reporting Act 2007 is expected to considerably reduce the risk as it serves to create a legal and regulatory framework for credit reporting in Ghana. The Credit Reporting Act mandates the Bank of Ghana to establish guiding principles for the credit reporting system and

provides for credit data submission, management, protection and dissemination. It strikes a balance between the borrowers privacy rights and the need to share credit information on borrowers with financial institutions

The table below shows the net spreads per bank from 2003 to 2007 and their rankings.

Net Spreads per Bank and Industry


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Bank Credit

The balance sheet structure of the banking industry has seen a continuous shift in asset portfolio from investments in government papers to loans to the private sector

Credit to Total Assets (flow) ratio has seen a gradual increase over the period with strong substitution in favor of loans to the private sector and less in debt instruments and securities. This development signals an increase in credit risk. The composition of banks loan portfolio by type of borrower shows Private enterprises accounting for 63.4 per cent in December 2008

Banks 2007 R 2006 R 2005 R 2004 R 2003 R

BBG 9.9% 10 12.3% 9 12.3% 9 13.0% 10 13.2% 10GCB 7.7% 19 15.0% 4 13.0% 7 14.0% 8 10.7% 14SCB 9.1% 15 14.1% 6 12.2% 10 12.7% 11 16.3% 6EBG 8.2% 18 11.1% 11 9.9% 15 15.1% 7 12.7% 11MBG 13.5% 4 8.1% 15 12.2% 12 11.5% 14 11.6% 12ADB 9.6% 11 12.6% 8 11.7% 14 15.8% 6 11.0% 13SGSSB 10.1% 8 14.2% 5 11.8% 13 18.5% 5 17.2% 3Stanbic 9.2% 14 8.5% 14 12.2% 11 6.7% 17 7.5% 16NIB 13.6% 3 12.1% 10 17.0% 3 11.4% 15 10.6% 15PBL 9.9% 9 9.0% 13 7.8% 17 8.4% 16 14.5% 7CAL 10.5% 7 7.8% 16 16.6% 4 12.7% 12 13.5% 9TTB 16.8% 1 15.3% 3 14.5% 5 21.3% 3 16.8% 5FAMBL 9.3% 13 5.2% 17 8.0% 16 12.1% 13 5.7% 17HFC 7.0% 20 3.0% 19 1.4% 19 0.7% 18 10.1% 18ZBL 7.0% 21 4.2% 18 0.6% 18Fidelity 0.8% 22ABL 8.2% 17 13.6% 7 20.7% 2 21.2% 4 17.1% 4Intercont 12.2% 5ICB 9.4% 12 10.1% 12 12.6% 8 13.0% 9 13.6% 8

UGL 12.0% 6 18.5% 1 13.9% 6 25.1% 1 31.1% 1GTB 8.3% 16BPI 14.7% 2 18.1% 2 24.1% 1 21.5% 2 31.0% 2Industry 9.4% 11.9% 12.2% 13.6% 12.7%


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16

down from the 64 per cent in 2007. Credit to the households is, however, on a steady rise. The share of household loans rose marginally to 17.6 per cent as of December 2008 from 17.5 per cent for the corresponding period in 2007. Credit to the government, public enterprises and public institutions also edged up to 19 per cent over the same period (Table 2). Distribution of the annual flow of Credit to the Private Sector

Distribution of

the

annual

credit

flow

remains

broad

based,

but

continued

to

be

skewed

in

favor of the services sector in particular (35.5 per cent in 2008 compared with 31.8 percent at end 2007), commerce and finance (19.1 per cent in 2008 compared with 17.1 per cent at end 2007), manufacturing (10.3 per cent in 2008 compared with 3.8 per cent at end 2007), import trade (6.7 per cent in 2008 compared with 2.3 per cent at end 2007), and construction (4.7 per cent in 2008 compared with 9.9 per cent at end 2007). The remaining sectors recorded varying levels of increases ranging between 0.4 and 4.2 per cent. The share of the agricultural sector rose to 4.2 per cent in 2008 from 3.7 per cent at end 2007.

Supply of Credit:

In the three months ended December 2008, the net percentage of banks reporting net tightening of credit stance for loans to both enterprises and households moved up. Cost of funds and expectation regarding tightening economic activities continued to be the most important factors cited by lenders for the tightening of credit stance. Similarly risk related to the current performance of the banks 50 largest borrowers also contributed to the net


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17

tightening of credit stance. Competition from other banks however contributed to a net easing of credit stance.

Demand for Credit:

Overall net demand for loans by enterprises and households declined in the last quarter of 2008 reflecting the high cost of funds and the low expectations on the economic outlook. Changes in financing needs for plant and equipment, inventories and working capital, property and debt restructuring were the key factors contributing to the decline in net loan demand for enterprises.

Individual Bank Performance

Bank 2003 2007Change

(GHC)

Change (%) 2003 2007 Cross

over

2003 2007 Change

BBG 356,710 1,090,673 733,963 206 1 1 None 2 1 1GCB 466,609 1,087,686 621,077 133 1 1 None 1 2 1SCB 342,642 730,913 388,271 113 1 1 None 3 3 0EBG 159,733 595,220 435,487 273 2 1 Up 6 4 2MBG 94,382 445,240 350,858 372 2 1 Up 8 5 3ADB 294,872 443,707 148,835 50 1 1 None 4 6 2SGSSB 194,572 389,874 195,303 100 1 2 Down 5 7 2Stanbic 40,165 334,001 293,836 732 3 2 Up 13 8 5NIB 95,743 291,410 195,667 204 2 2 None 7 9 2PBL 57,073 226,737 169,664 297 3 2 Up 10 10 0CAL 56,912 219,167 162,255 285 3 2 Up 11 11 0TTB 59,248 205,155 145,908 246 2 3 Down 9 12 3

FAMBL 38,666 160,425 121,759 315 4 3 Up 14 13 1HFC 47,125 154,713 107,588 228 3 3 None 12 14 2ZBL n/a 145,179 145,179 n/a n/a 3 n/a n/a 15 n/aFBL n/a 142,195 142,195 n/a n/a 3 n/a n/a 16 n/aABL 28,690 133,933 105,243 367 4 4 None 15 17 2InterCont n/a 86,627 86,627 n/a n/a 4 n/a n/a 18 n/aICB 20,428 73,881 53,453 262 4 4 None 16 19 3UGL 9,139 57,255 48,116 527 4 4 None 18 20 2GTB n/a 34,367 34,367 n/a n/a 4 n/a n/a 21 n/aBPI 10,865 26,659 15,794 145 4 4 None 17 22 5

Operatingassets(GH'000) Quartile Group Industry Ranking


18/40


19/40

200%0%

200%

2002 2003 2004 2005 2006

NonLife (Reinsurance)

The Insurance Industry

Overview Ghanas total insurance premium in 2007 amounted to $219MM with a split of $147MM from Non Life (67% of total premium) and $72MM from Life (33% of total premium). The industry over the last five years has experienced considerable growth (ranging from 20% to over 50%) with the highest growth experienced by the life sector. It must be noted however that the growth has been achieved from a relatively low base.

Year over Year Growth Insurance Premium YOY Growth Reinsurance Market

Insurance density and penetration On a per capita basis, an average of $3,577 was spent on insurance in industrialized countries in 2007; of this amount $2,143 was spent on life insurance while $1,434 was spent on non life insurance. Insurance penetration (measured as premium as a percentage of GDP) remained unchanged at 9%. In comparison, insurance penetration in Ghana, like other peer economies in the region, remains at the lowend with premium per capita at $9, split between Non Life and Life at $6 and $3 for respectively. This represents a penetration rate of only 1.5% and suggests considerable room for future improvement.

0%

10%

20%

30%

40%

50%

60%

70%

2002 2003 2004 2005 2006 2007

Non Life Life Total Premium

Life Non-LifeTotal

BusinessNon-Life Life

TotalBusiness

South Africa 12.5% 2.8% 15.3% South Africa 159.5 719.0 875.5Namibia 5.7% 2.4% 8.1% Namibia 86.0 203.5 289.6Africa 3.1% 1.2% 4.3% Africa 15.8 39.6 55.3Botswana 2.8% 1.1% 3.9% Botswana 60.1 162.0 221.1Kenya 0.8% 1.7% 2.5% Kenya 13.1 6.1 19.2Ghana 0.5% 1.0% 1.5% Ghana 6.3 3.0 9.3Egypt 0.4% 0.4% 0.9% Egypt 7.6 6.8 14.4Nigeria 0.1% 0.5% 0.6% Nigeria 4.6 0.9 5.5

Insurance penetration: premiums in % ofGDP in 2007

Insurance density: premiums per capita inUSD in 2007


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Structure

Ghanas industry is regulated and supervised by the National Insurance Commission. By the end of 2008, the industry was made of

18 NonLife Insurance companies;

16 Life Insurance companies; 2 Reinsurance Companies; 36 Insurance Broking companies; One reinsurance broking company; and One loss adjusting company.

Insurance companies are also allowed to use Reinsurance companies outside Ghana in 2007 reinsurance premium paid to overseas companies was about $5Million.

Regulation

In 1989,

PNDC

Law

227

was

passed,

setting

up

the

National

Insurance

Commission

(NIC)

as

the

independent regulator. The Commission is the regulatory body responsible for supervising, regulating, monitoring and control of insurance to protect insurance policy holders and the insurance industry. In 2006 a new insurance act (Act 724), replaced PNDC Law 227. The aim was to create a law that complied with the regulatory standards of the International Association of Insurance Supervisors (IAIS).

Insurance Act 2006 Liberalizing the Insurance Industry: The new Act brought along the following modifications and new regulations, aimed at liberalizing and strengthening the sector:

1. Removal of monopoly enjoyed by the state owned insurance company State Insurance Company Ltd to insure all government business;

2. Termination of compulsory payments to Ghana Reinsurance Company Ltd (Ghana Re) by all insurance companies (effective 1st January, 2009)

3. Complete removal of investment restrictions previously 75% of non life investments was to be in government bills and 25% in other securities approved by the NIC; Life investments was supposed to be 50% in Government bills and 50% in NIC approved securities

4. Removal of minimum Ghanaian shareholding of at least 40% insurance companies can be 100% foreign owned

5. Separation of general business from life business. This is to give the life sector the

capitalization, managerial and marketing expertise needed to grow. 6. Strengthening reporting requirements by establishing quarterly and annual returns to NIC

7. Minimum capital base for operating general business and life business set at $1M each, Reinsurance is set at $2.5M and brokerage set at $25K. NIC also has the right to request the injection of additional capital if the business requires it.


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21

8. Whistle blowing provision auditors and actuaries to report to the NIC any contraventions of the ACT

9. Compulsory life and allied perils insurance for commercial buildings under construction and existing commercial buildings

Performance

Gross Premium Income Analysis

USD 2003

% of Premi

um 2004

% of Premi

um 2005

% of Premi

um 2006

% of Premi

um 2007

% of Premi

um

Motor 33,506,927

40% 39,920,171

38% 53,884,152

40% 66,901,524

36% 71,713,279

33%

Accident

14,083,905 17%

16,776,717 16%

19,572,466 14%

25,255,825 14%

39,376,018 18%

Marine 6,458,150

8% 8,201,

867 8%

10,280,170

8% 11,047,377

6% 10,342,710

5%

fire 12,770,801

15% 14,093,713

14% 16,900,681

13% 26,520,175

14% 25,587,174

12%

Total NonLife

66,819,782

80% 78,992,469

76% 100,637,46

8 74%

129,724,90

1 70%

147,019,18

1 67%

Life/Health

16,582,473

20% 25,070,987

24% 34,532,535

26% 56,157,724

30% 71,596,914

33%

Total Premiu

m

83,402,255

100% 104,063,45

6 100%

135,170,00

3 100%

185,882,62

5 100%

218,616,09

5 100%

Reinsurance Gross Premium Analysis

USD 2003

% of Premiu

m 2004

% of Premiu

m 2005

% of Premiu

m 2006

% of Premiu

m 2007

% of Premiu

m

Non Life 22,473,361

99% 24,113

,437 97%

26,554,086

98% 36,243

,783 98%

39,896,809

99%


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22

Life 323,2

55 1%

626,121

3% 506,46

2 2%

928,444

2% 562,61

9 1%

Total Reinsura

nce

22,79

6,615

100%

24,739

,559

100%

27,060

,548

100%

37,172

,226

100%

40,459

,428

100%

Profitability and Financial Strength

The industry is quite profitable claims and expense together account for roughly 55% of the premium, leaving 45% of the premium as excess funds. In addition to this they have investment income averaging 10% of the industries premium as additional income.

Figures Based on Industry Average

The Central Bank and its role in the Economy:

THE ROLE of THE BANK OF GHANA (http://www.bog.gov.gh/index1.php?linkid=270#597)

Under the Bank of Ghana Act (Act 612), the governing body of the Bank is the Board of Directors. The Board consists of the Governor as Chairman, the First and Second Deputy Governors, and nine Directors, where, one of the nine Directors is a representative of the

Ministry of Finance and Economic Planning. The Board of Directors is appointed by the President of Ghana in consultation with the Council of State. All the members of the Board, other than the Governor and his two deputies, hold office for a three year period, but are eligible for re appointment.

The responsibilities of the Board as provided by the Act involves formulating policies necessary for the achievement of stability in general level of prices, as well as effective and efficient

13% 9% 9% 9% 10%

18% 20% 23% 20% 22%

34% 34% 36%36% 32%

80%

60%

40%

20%

0%

20%

40%

Investment Income / PremiumClaims Ratio / PremiumEpense Ratio / Premium

2003 2004 2005 2006 2007


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23

banking and credit systems in the country. The Act also established a Monetary Policy Committee (MPC) of the Bank with the following responsibilities:

i. Initiating proposals for the formulation of monetary policies of the bank; and

ii. Providing the statistical data and advice necessary for the formulation of monetary policy.

Membership of the MPC comprises the Governor and the two deputies, the heads of Monetary Policy Analysis and Banking departments and two appointees of the Ministry of Finance and Economic Planning.

The Act also provides for the appointment of committees that are necessary for the purpose of advising the Board. Accordingly, the Board has appointed five committees namely, Human Resource, Corporate Governance, Economy and Research, Strategic Planning and Budget and Audit.

PRIMARY OBJECTIVES OF THE CENTRAL BANK

(http://www.bog.gov.gh/privatecontent/File/Secretarys/bog act.pdf)

The Bank has the dual role of: 1. Maintaining price stability;

2. Supporting the general economic policy of the Government and promoting economic growth and the effective and efficient operation of banking and credit systems in the country, independent of instructions from the Government or any other authority.

KEY FUNCTIONS OF THE BANK

The key functions of bank include:

a. Formulating and implementing monetary policy aimed at achieving the objectives of the Bank;

b. Promoting by monetary measures, stabilization of the value of the currency within and

outside Ghana; c. Instituting measures which are likely to have favourable effects on the balance of payments, the state of public finances and the general development of the national economy;

d. Regulating, supervising and directing the banking and credit systems to ensure the smooth operation of the financial sector;

e. Promoting, regulating and supervising the payment and settlement systems;


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f. Issuing and redeeming the currency notes and coins; g. Ensuring the effective maintenance and management of Ghana's external financial

services; h. Licensing, regulating, promoting and supervising non banking financial institutions; i. Act as the banker and financial adviser to the Government;

j. Promoting and maintaining relations with international banking and financial institutions and subject to the Constitution or any other relevant enactment, implementing international monetary agreements to which Ghana is a party; and

k. Doing all other things that are incidental or conducive to the efficient performance of its functions under this Act and any other enactment.

Role of the Monetary Policy Committee (MPC)

The MPC is responsible for: a. Initiating proposals for the formulation of the monetary policies of the bank; and

b. Providing the statistical data and advice necessary for the formulation of monetary policies.

Since 2007, inflation targeting has become a key objective of the Bank and likewise, that of the MPC. Under Bank of Ghana Act 2002, the Bank became one of the growing numbers of statutorily independent central banks in the world, allowing the Bank of Ghana to adopt a trend towards greater clarity, transparency and specificity in communication with the public.

Globally, transparency and communication with the public regarding information relevant for the policy making process, has become the new paradigm in the practice of monetary policy. With this in mind, the MPC recognizes monetary policy to be more effective when provided to the public with guidance on its objectives, activities and outlook. Accordingly, there are in place, practices that have come to place the new monetary policy framework highly on the transparency scale, even though the MPC does not publish minutes of it meetings. However, five volumes of statistical releases containing enough information to make policy understandable to those outside the policy process are made to the public after each policy meeting.

The Table below shows Ghana in comparison to selected advanced economies with respect to the most widely accepted issues of monetary policy transparency.


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Exchange Rate Policy

(http://www.imf.org/external/np/mfd/er/2006/eng/0706.htm )

The Board of the Bank, in consultation with the Minister, formulate exchange rate policy.

Ghana operates a Managed floating regime with no pre determined path for the exchange rate but anchored by a monetary policy framework based on inflation targeting. The Bank attempts to influence the exchange rate without having a specific exchange rate path or target.

Indicators for managing the rate are broadly judgmental (e.g., balance of payments position, international reserves, parallel market developments), and adjustments may not be automatic. Intervention may be direct or indirect. The Bank also uses its instruments to achieve a target growth rate for a monetary aggregate, such as reserve money, M1, or M2, and the targeted aggregate then becomes the nominal anchor or intermediate target of monetary policy.


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26

THE GOVERNMENT BOND MARKET:

Government Securities The bond market is nascent, and there has been a conscious effort on the part of the Bank of

Ghana (BoG) and Ministry of Finance and Economic Planning (MoFEP) to effect a change by promoting bond market development. The government is the main issuer of debt securities. As of March 2009, total outstanding government securities stood at GHS 3,440mn (USD 2,529mn) comprising mostly of short term bills, and to a smaller extent notes and longer term bonds. Bonds listed on the local exchange comprise of longer dated government securities (maturities of two years and above) and a few corporate bonds (including issues under HFC Bank shelf registration program and Standard Chartered Bank MTN Programme). The legal framework of the capital markets is defined by the Securities Industry Law of 1993 (amended in 2000) and the Securities and Exchange Commission (SEC) Regulations (2003). The SEC acts as the primary

regulator of capital market activities in Ghana. The Ghana Stock Exchange (GSE) has its own separate regulations that govern admissions to listing securities on the stock exchange.

Ghana Sovereign Rating

Long Term Local Currency Foreign CurrencyFitch B+ B+S&P B+ B+

The Bank of Ghana holds weekly auctions on Fridays for the sale of BoG treasury bills and bonds

to 17 primary dealers, known as Government Securities Dealers. There is no set issuance calendar for the longer term treasury bonds. Issuance of treasury bills is via a multiple price auction while treasury bonds are issued via a uniform price auction.

The following BoG securities are issued in the debt market: Treasury bills (91, 182 day) 1year note 2year fixed rate 2year floating rate

3year fixed rate 3year floating rate 5year fixed rate (Since 2007)


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27

The market has been very illiquid, with major activity occurring in money market instruments. The interest rate on the 2year floating rate note is tied to the 91day Tbill rate, while the 3

year floating note is issued at a spread over the 182 day Tbill rate. These notes are an offshoot of the Government of Ghana Index Linked Bonds (GGILBs) that were introduced in 2001 as part of the aim to convert short term liabilities into longer term obligations. The GGILBs are being phased out by the new 2 and 3 year fixed and floating rate notes. The 5year bond was issued for the first time in December 2006, and is the governments longest dated security.

Interest Rate Term Structure

Overnight 21.5% 91day 25.7%

182 day 28.0% 1 year 21.0% 2 years 21.0% 3 years n/a

5 years n/a

This issuance is part of the Governments plan to extend the yield curve to provide longer dated securities in the market. As inflation declined through 2005/2007, interest rates on treasury securities fell significantly to match inflation expectations. There was a significant decline in

yields on 2 and 3year bonds when the BoG cut its prime rate by 200 basis points to 12.5 percent at the end of 2006. However, much of that progress has been eroded with inflation gradually creeping back up and prime rate increasing to 18.5% and 91day Tbill rates at 25% by the end of the first quarter of 2009. Furthermore, demand for government securities have been limited to the short end of the yield curve due to high inflation expectations.

61%11%

28%

Bills (91, 182 days) Notes (1-2 yrs) Bonds (2+ yrs)


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Government Bonds Outstanding (Q1'09)

Issue Date Maturity Coupon Amount

Outstanding (GHS) Tenor (years)

21Jul

08

20

Jul

09

18.00 1,738,033.00

1

21Jul08 19Jul10 17.50 2,513,365.00 211 Sep 06 7Sep09 16.00 67,000,000.00 35May08 2May11 16.00 53,287,000.00 317Dec07 10Dec12 15.00 50,730,000.00 521Dec06 15Dec11 14.47 75,600,000.00 529Jan07 25Jan10 14.00 24,172,400.00 310Mar 08 7Mar 11 14.00 64,502,000.00 317Dec07 13Dec10 13.95 35,450,000.00 3

19Mar

07

15

Mar

10

13.69 71,000,000.00

318Jun07 11 Jun12 13.67 142,300,000.00 5

2Apr07 29Mar 10 13.50 72,800,000.00 36Aug07 2Aug10 13.00 101,000,000.00 314May07 10May10 12.39 107,800,000.00 311 Jun07 7Jun10 12.08 100,000,000.00 3 969,892,798.00

NonCentral Government Issuance:

Corporate bond issuance in Ghana gained ground in 2005/2006 when there was a full yield curve, low inflation and general optimism about the outlook for the economy. However, issuers still remain limited in number and there is little to no secondary market activity. This has dampened the sentiments surrounding corporate bond issuance; there has been no activity in that space since 2007. The government is currently working on an amendment of the existing Act that restricts borrowings by municipalities; upon conclusion, municipal bonds are scheduled to be launched in the near future to create access to cheaper and long term funding for municipal authorities. Below is a list of current corporate bonds in issue

ISSUER ISSUE DATE INDUSTRY AMOUNT ('mln) TENOR COUPON

Barclays Bank of Ghana 2006 Banking GHS 10 10 14%Standard Chartered Bank Ghana 2005 Banking GHS 3.5 3 TB + 2%


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29

Standard Chartered Bank Ghana 2005 Banking GHS 9.15 undated TB + 3% Home Finance Company Ltd 2004 Mortgage USD 2.5 5 5%

In

October

2006,

the

African

Development

Bank

(AfDB)

became

the

first

supranational

borrower to issue a bond denominated in Ghanaian Cedis. This two year bond, worth USD 45mn (equivalent of GHS 42mn) linked to the Ghanaian Cedi. On the back of strong foreign investor demand, the AfDB was able to upsize the issue by 50%. The AfDB is also in the process of issuing cedi denominated bonds in the local market, with the aim of providing longterm local currency financing to support development projects through direct project lending or lines of credits to financial institutions and simultaneously deepening the bond market in Ghana.

Secondary Market:

Secondary market trading of government securities used to take place only over the counter through a network of primary dealers. However, in 2006, the Government, aware of the shortcomings of an illiquid bond market, listed all outstanding 2 and 3year BoG bonds on the GSE, both floating and fixedrate issues. The new 5year bond was also listed on the Exchange, all in a bid to enhance the secondary trading of these bonds, to ensure liquidity. This has been viewed as a positive development in the market, especially since the aim of the Government is to provide benchmark securities for corporate issuers, and promote a deepening of the market. The listing would also provide enhanced access for investors to bid for securities, rather than submitting a bid through a licensed dealer. Workshops and seminars have been held by authorities geared towards equipping all authorized primary dealers and Licensed Dealing Members of the Exchange with bond market fundamental such as bond pricing, issuance dynamics and trading.

Clearing and Settlement:

Clearing and settlement is still largely done by manual processes. The government is taking steps to introduce a Real Time Gross Settlement (RTGS) system. A central depository system has been implemented for government securities and will soon be extended to cover all securities listed on the Ghana Stock Exchange after an appropriate enabling law is passed. Settlement of government securities is at T+1 and through central bank clearing. GSElisted stocks are settled manually at T+3.


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Ghana Stock Market: Capital markets are developing quickly in Ghana and are regulated by the Ghana Stock

Exchange (GSE) which started operations in 1990. As of March 2009, the GSE had 31 listed companies, with a market capitalization of approximately GHS 14.54bln (USD 10.6bn). The GSE sets the rules and regulations for companies and other entities seeking to be publicly listed on the GSE. The GSE is governed by a Council (Board of Directors) with representation from licensed dealing members, listed companies, banks, insurance companies and other persons of the Ghanaian finance and public service sectors. The All share Index of the Ghana Stock Exchange has grown at a 10 year compounded annual growth rate of 30.6% while the 10year average annual return is 37%. The manufacturing, brewery and banking sectors dominate the exchange. The market currently has 31 listed companies with total capitalization of GHC 14.5bln or 105% of GDP. The top 10 firms by capitalization represent 95% of total market cap. The top 3 firms represent 81% of total market cap. It is important to note that the two largest listings are multinational corporations simultaneously listed in other stock markets, hence their relatively large capitalization compared to the other listed companies. In 2008, 546 million shares worth GHC 381mln traded on the exchange, an increase of 90% and 170% respectively over 2007.

The exchange enjoyed a sharp bull run from 2002 2004; this was attributed to significant macroeconomic advancements during that period. However, it was followed by a selloff in 2005/2006 and the overvaluation that resulted from that period has systematically corrected over the past four years. Liquidity in the market is relatively low; many of the smaller stocks rarely trade. For instance, seven of the 31 listed companies have had no trading activity in their

-40%-20%

0%20%40%60%

80%100%120%140%160%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1'09


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shares since the start of 2009. Trading activity is concentrated in the top 12 14 stocks by capitalization. Clearing and settlement was done manually until December 2008. The exchange launched its automated trading platform in January 2009 and also established a central securities depository for uniform clearing; however, settlement is still at T+3. Holdings in the market are still mostly local and concentrated amongst individual and retail investors. There is increasing presence of indigenous institutional investors on the exchange as the nascent mutual fund industry picks up.

Regional integration initiatives:

The three stock exchanges in the West African region; The Nigerian Stock Exchange, The Ghana Stock Exchange and the BRVM in Cote Divoire are in an ongoing harmonization talks to establish uniform rules, regulations and operational procedures. The aim is to allow free access to investors and issuers across the three markets.

In addition, the GSE has signed Memoranda of Understanding with the Kenyan Stock Exchange and the Nigerian Stock Exchange for cross border listing of securities quoted on their markets. The first success was the simultaneous listing of Ecobank Transnational Incorporated on the Nigerian Stock Exchange, the Ghana Stock Exchange and the BVRM in Cote dVoire.

Foreign Participation:

Current regulations allow foreigners to invest in securities listed on the Ghana Stock Exchange without exchange control restrictions. In December 2006, the new Foreign Exchange Act 2006 (Act 723) came into effect, allowing nonresidents and foreign investors to bid for securities issued by the Government of Ghana. Foreign investors and non residents are allowed to invest in capital market instruments of a tenor of three years or more. There are some restrictions on portfolio investments by foreigners and non residents. A single investor (institution or individual) may not own more than 10% equity in any listed company. Furthermore, listed companies may not exceed 74% cumulative foreign ownership (Ashanti

Goldfields is exempt from this law). There are no regulatory controls of remittance of original investment capital, capital gains, dividends, interest, and other related earnings. To facilitate this, non residents are also allowed to maintain foreign currency accounts with local banks, which can be credited with transfers in foreign currency from abroad or other foreign currency accounts. This development resulted in a strong foreign investor participation level in the BoGs new 5year bond issue in January 2007. Furthermore, the capital account was partially


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32

liberalized in December 2006 as a result of the passing of the new Foreign Exchange Bill. The approval of the central bank is no longer required to repatriate funds out of the country, although it still needs to be notified of such actions. Companies listed

Name Bloomberg Ticker

Shares Outstanding (mln)

MKT CAP (GHS 'mln)

% of Total

Average

daily trading Volume

AngloGold Ashanti AGA GN 263.64 7,404.38 51.08% n/a

ETI ETI GN 8,733.44 3,668.04 25.31%

1,233,000

Golden Star Resources GSR GN 235.43 729.83 5.04% n/a

Standard

Chartered

Bank

Ghana SCB GN 17.60 668.80 4.61% 41,974 Ecobank Ghana EBG GN 152.95 481.79 3.32% 38,605Guinness Ghana Breweries GGBL GN 164.67 296.41 2.04% 54,828Unilever Ghana UNIL GN 62.50 218.75 1.51% 140,140SGSSB SGSSB GN 142.50 162.45 1.12% 39,325Produce buying co ltd PBC GN 480.00 100.80 0.70% 41,920Fan Milk Ltd FML GN 19.79 75.18 0.52% 76,090Ghana Commercial Bank ltd GCB GN 165.00 74.25 0.51% 107,994SIC Insurance Co Ltd SIC GN 195.65 68.45 0.47% 442,719Enterprise Insurance Co ltd EIC GN 25.57 68.01 0.47% 23,312Ghana Oil Co GOIL GN 210.19 63.06 0.44% 160,770HFC Bank Ghana HFC GN 100.16 62.10 0.43% 64,609

CAL Bank LTD CAL GN 155.09 52.73 0.36% 2,368,000

Cocoa Processing Co Ltd CPC GN 861.48 43.07 0.30% 64,852Trust Bank Ltd Gambia TBL GN 30.00 39.90 0.28% n/aTotal Petroleum Ghana TOTAL GN 4.73 35.91 0.25% 1,007PZ Cussons Ghana PZ GN 28.00 33.60 0.23% 3,028Benso Oil Palm Plantation BOPP GN 34.80 30.62 0.21% 50,916Ayrton Drug mnuf. AYRTN GN 180.00 28.80 0.20% 85,103Accra Breweries LTD ABL GN 249.45 28.69 0.20% n/aAluworks Ghana ALW GN 41.68 22.92 0.16% 391,612Mechanical Lloyd Co Ltd MLC GN 50.10 10.52 0.07% n/a


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CFAO Ghana CFAO GN 224.00 8.96 0.06% 92,148

Transactions Solutions Ghana TRANSOL GN 80.00 8.80 0.06% 750

Clydestone Ghana CLYD GN 34.00 2.72 0.02% n/aSuper Paper Products SPPC GN 19.44 1.94 0.01% 16,855Starwin Products SPL GN 37.38 1.87 0.01% 23,340Pioneer Kitchenware PKL GN 16.50 1.16 0.01% n/a TOTAL 13,015.71 14,494.51 100% 179,448

15year Trend in the GSE All Share Index level

12Month Trend in GSE All Share Index Level

2,000

4,000

6,000

8,000

10,000

12,000


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Investment Taxation:

A withholding tax rate of 10% is applicable to interest income. Dividends are subject to a

withholding and final tax of 8%. A temporary exemption on capital gains on securities listed on the Ghana Stock Exchange is also in force, which is expected to last until 2015. Ghana has double tax treaties with the United Kingdom, France, South Africa and Italy. Other tax obligations include: corporate tax at 25%, tax on dividends at 7.5%, capital gains tax at 10% and VAT at 15% (not levied on non Ghanaian investors). Venture capital companies receive a 5year tax holiday. Financial institutions investing in venture capital subsidiaries may deduct 100% of their equity investment from their taxable income for the year of investment.

Derivatives: Ghana does not have a fixed income derivatives market. Enhanced liquidity in the foreign exchange market could lead to a growth in foreign exchange derivative instruments in the near term.

2,000

4,000

6,000

8,000

10,000

12,000


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Other types of Financing:

The table below shows the various types of non banking financial institutions allowed to operate in the country

L I C E N C E CORE LINES OF BUSINESS

1. Discount House Trading in short dated financial securities intermediation between banks, commerce and industry for call deposits to invest in short dated financial securities.

2. Leasing and HirePurchase Companies

Financing the acquisition of equipment, vehicles and consumer durable, etc. through finance lease and/or hire purchase

3. Savings and Loans Companies

Deposit taking and lending to individuals, groups, business enterprises, consumer credit and hire purchase financing.

4. Mortgages Finance Companies

Lending funds for residential and commercial property acquisition, up grading of existing property and taking a mortgage on the property financed. Dealing in Securities collateralized by such mortgages.

5. Building Societies Mobilizing funds from members for the purpose of assisting members to acquire residential properties and land. Loans extended are secured by Mortgages on the property.

6. Acceptance Houses

Financial institutions which specialize in accepting bills drawn on them under credit established in favor or approved customers. The substantial part of the business of these houses should consist of accepting bills to finance the trade of others. As acceptors, these

houses have to honor and pay the bills drawn at maturity. Basically they should be companies mainly engaged in trade bills and operating in the money market to supplement the discount houses and banks in the short term market.

7. Finance Companies

Provide consumer credit, business finance and subscribing to short term securities.

8. Credit Union Financial cooperatives formed to mobilize savings from and lend to its own members.

9 PEs & VCs PE and VC companies have sprung up in the West Africa sub region

and they invest equity capital in private companies and start ups. PEs and VCs provide long term financing needs which the financial institutions are not willing to provide for companies. Majority of their financing has been in oil and gas, banks, telecommunication (wireless), Manufacturing and Information Technology service companies.


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10 International Development Finance Institutions (IDFIs)

International Developmental Institutions like IFC, AFDB, The World Bank, FMO, CDC, etc who specializes leveraging their AAA ratings to raise capital in the international capital markets and then lend these monies to the government and the private sector. Like PEs/VCs IDFIs provide long term financing.

As at April 2008 the number of registered non banking financial institution registered and operating in the country were:

These companies are all private companies thus we were unable to obtain data as to their current revenue and capitalization base.

Bankruptcy Code:

The Ghana companies code which governs how businesses are formed and liquidated, follows the British bankruptcy jurisprudence. There are two ways by which a bankruptcy or

insolvency can be sought in Ghanaian courts. The first one is for a complete liquidation of a company. If complete liquidation is sought, then the court will appoint a bankruptcy trustee to sell the assets of the company to pay creditors base on a formula determine by a bankruptcy judge.

The second way by which bankruptcy can be sought in Ghana is for restructuring of a company to make it competitive and solvent. Here the court appointed trustee will instructions from the court will determine the hair cut or losses that creditors, investors and business partners will take to help the company to be solvent.

In 2003, the World Bank recommended to the Ghana government that Ghanas bankruptcy code need to be reformed if the country wants to attract foreign investors and business into the country.

Type of InstitutionNumber in

the CountryDiscount House 1Fiance House 19Export Financing 1Leasing 7Mortgage 1Savings & Loans 15Total 44


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According to a 2005 Memorandum of Economic and Financial Policies of the Government of Ghana, the Ghanaian authority plans to reform and improve the Insolvency Bill and Companies Code that will address the lack of clarity regarding the rights of both creditors and borrowers. According to the U.S. Department of Commerce's 2006 edition of its Country Commercial Guide to doing business, in Ghana, there is no effective bankruptcy law on the books yet. The Companies Code of Ghana specifies procedures for debt collection and liquidation procedures for a going concern.

The World Bank's 2007 "Doing Business" evaluation of Ghana discloses that, in the sphere of business liquidation, Ghana does somewhat better than the regional averages, but significantly underperforms in comparison with the average experienced by members of the Organization for Economic Cooperation and Development (OECD). In Ghana, it takes an average of 1.9 years to close a business, at an average cost of 22%, and with an average recovery rate of $0.24 on the dollar. This compares with a regional average of 3.4 years, 20%, and $0.171 on the dollar. The average performance experienced by members of the OECD is 1.3 years, 7.5%, and a recovery rate of $0.741 on the dollar.

In 2008, the Ghana parliament passed laws to reform the Insolvency Act, Bill and Companies Code to give more clarity as to the rights of creditors and borrowers and the process for winding down or restructuring a company. Although parliament has passed the legislation to reform and improve the bankruptcy code in Ghana, many observers have said that the reforms dont go far enough and also there are no legal structures to implement the reforms efficiently and effectively.

Capital Controls:

As a result of World Bank/IMF Structural Adjustment reforms initiated by Ghana in the 1980s and 1990s, capital controls was loosened by the Bank of Ghana (BoG) to attract foreign investors to participate in the Ghanaian economy. Although capital control restrictions have been loosened, the BoG still regulates how much foreign exchange can be transferred out of Ghana as part of its monetary policy to stabilize the Ghana currency, the Cedi. Also, the regulation of foreign exchange that can be transferred out of Ghana is another tool use by the Ghanaian authorities to fight money laundering.

Also, the Ghana Company Act and Investment Promotion Act allow foreign investors to have 100% ownership of a company or business operating in the Ghana free zone board. But if the company is not establish to operate in the Ghana free zone then a foreign investor can have 100% ownership, but rather he or she should partner with Ghana citizen(s).


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The Company Code of Ghana and the foreign Investment Act stipulates the percentage of profit that can be repatriated by foreigners doing business in Ghana. Currently, foreign investors can repatriate 100% of profits to their home country annually.

Also, companies that operate in the Ghana also enjoy the following profit repatriation benefits.

No conditions or restrictions on repatriation of dividends or net profit; No conditions or restrictions on payments for foreign loan servicing; No payments of fees and charges for technology transfer agreements;

No conditions or restrictions on the remittance of proceeds from the sale of any interest in a free zone investment.


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Sources:

o Bank of Ghana, www.bog.gov.gh o Ghana Stock Exchange, www.gse.com.gh o Standard & Poors, www.standardandpoors.com o Fitch Ratings, www.fitchratings.com o Cowan, David, SubSaharan Africa, How? Citi Economics & Market Analysis,

September 18, 2007 o Teal, Francis, Commission for Africa and Economic Research on Growth, Centre

for the Study of African Economies, Research Summary 2004/05 o Matin, Imran et al. Financial Services for the Poor and Poorest: Deepening

Understanding to Improve Provision Development Initiative, Working Paper 9 http://devinit.org/findev/Working%20Paper9.htm

o International Monetary Fund, Regional Economic Outlook, SubSaharan Africa, various editions

o Selected Statistics on African Countries, African Development Bank Research (2006, 2007, 2008)

o Africa Fixed Income Guidebook, African Development Bank Research (2006) o AfDB Statistics Pocketbook, African Development Bank Research (2006, 2007,

2008) o Africa Investment Climate Report, African Development Bank Research (2007) o Bank of Ghana Financial Stability Report, Feb 2009 o Bank of Ghana Fiscal Development Report, Feb 2009 o Bank of Ghana Monetary & Financial Development Report, Feb 2009 o Ghana Banking Survey 2008 by PWC o National Insurance Commission 2007 Annual Report o Business Monitor International Ghana country reports 2007 Q1 2009 o http://www.ghanaembassy.or.kr/greetings/ecomy.html

o http://www.bog.gov.gh/privatecontent/File/Secretarys/bog act.pdf

o http://www.imf.org/external/np/mfd/er/2006/eng/0706.htm o http://www.bog.gov.gh/index1.php?linkid=270#597


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GSE ListedCompanies

GHANA MACROECONOMIC D

Documents

Ghana Final