In an insightful conversation between the B&FT’s Joshua Worlasi Amlanu and Ebenezer Chike Adjei Njoku and the Chief Executive Officer (CEO) of the Ghana Association of Banks (GAB), John Awuah, the state of the Ghanaian banking industry takes center stage. The dialogue delves into the transformative journey of the industry before and after the implementation of the Domestic Debt Exchange Programme (DDEP).
Before 2018, the banking sector encountered turbulence with a multitude of banks, non-bank financial entities, and others operating with precarious balance sheets, resulting in instability. Recognising the urgency to address this predicament, the central bank initiated a comprehensive reform process to establish a healthier financial landscape.
Corporate governance was a focal point in this transformation, as breakdowns in this area were identified as contributing factors to the challenges faced. 2018 marked a pivotal moment, witnessing the central bank’s concentrated efforts in elevating corporate governance structures, establishing well-administered banks capable of prudently managing customer deposits and preserving the stability of the financial ecosystem. The outcome was the recalibration of several microfinance institutions, finance houses, and other entities lacking the essential financial underpinnings.
The rejuvenation of the industry entailed enhanced regulatory oversight and the rebuilding of trust. Subsequent years ushered in a surge in secondary market activities, with collective investment schemes gaining traction, rekindling confidence in the financial sector.
In 2022, collaborative discussions between the government and industry stakeholders yielded strategies for enduring stability. A mechanism was devised to address illiquid instruments emerging from the DDEP, ensuring market participants could effectively manage their investments.
By the first half of 2023, the banking sector displayed signs of resurgence and resilience, as financial reports indicated optimistic performance trajectories. Amidst challenges and fluctuations, the robust underlying performance remained steadfast, instilling faith in the sector’s capability to navigate business uncertainties.
This illuminating dialogue offers valuable insights into the banking industry’s transformation, resilience, and trajectory, casting light on the influence of the DDEP, recovery prospects, and measures adopted to navigate challenges and foster growth.
B&FT: Give us an introduction remarks on the state of the Ghanaian Banking Industry particularly with a view on recovery, highlighting the state of the industry prior to the DDEP and after.
John Awauh (GAB CEO): The state of the Ghanaian Banking Industry went through significant changes before and after the implementation of the Domestic Debt Exchange Programme (DDEP). Prior to 2018, the industry faced challenges with numerous banks, non-bank financial players, and other entities operating without strong balance sheets, leading to instability. The central bank recognised the need to address this issue and initiated a clean-up process to ensure a healthier financial system.
This initiative involved steps to improve corporate governance, as many problems stemmed from breakdowns in this area. The year 2018 marked a turning point, with the central bank focusing on enhancing corporate governance structures to ensure well-run banks that effectively managed customer deposits and maintained the solvency of the banking system. This overhaul led to the collapse of several microfinance institutions, finance houses, and other entities lacking the necessary financial foundations.
As part of this transformation, the industry experienced improved regulatory oversight and efforts to rebuild confidence. The subsequent years saw increased activity in secondary markets, with collective investment schemes gaining traction and contributing to renewed confidence in the financial system.
Approaching 2022, the government and industry players collaborated to find solutions for sustained stability. Amid discussions and meetings, a mechanism was devised to address the illiquid instruments resulting from the Domestic Debt Exchange Programme. This mechanism allowed for trading and liquidity, ensuring market participants could manage their investments effectively.
By H1 2023, the banking industry showcased signs of recovery and resilience, with financial statements indicating positive performance trends. Despite occasional challenges and fluctuations, the underlying performance remained strong. This solid foundation provided confidence in the industry’s ability to weather business fluctuations and uncertainties.
Ultimately, the Ghanaian Banking Industry’s journey before and after the Domestic Debt Exchange Programme demonstrates a commitment to improving governance, stability, and sustainability. The industry’s ability to adapt, collaborate, and ensure liquidity in the face of challenges underscores its resilience and capacity for recovery.
The recent report from the Bank of Ghana indicates a strong rebound in profitability for the banking sector in the first half of 2023, following significant losses incurred at the end of 2022. What do you attribute this positive turnaround to, and how do you foresee this trend impacting the sector’s resilience in the future?
The recent report from the Bank of Ghana highlights a notable rebound in profitability within the banking sector during the first half of 2023. This positive turnaround comes after the sector faced significant losses at the close of 2022. Analysing this trend requires a broader perspective beyond short-term fluctuations. To assess the true trajectory of performance, it’s crucial to establish a trend based on a series of consistent data points, rather than relying on performance over just a few months.
Considering this context, the industry recognises that sustained performance and resilience stem from more than isolated periods of gain. A strong underlying performance is essential, as it forms the foundation for resilience and long-term stability. The ability of the sector to absorb future shocks and challenges is a key consideration. This involves examining factors such as stress testing, the impact of testing and domestic boiler points, and the implications on the banks’ books.
The losses experienced by the sector largely resulted from market-related factors, including the reduction in coupon rates due to the Domestic Debt Exchange Programme.
However, the industry believes that with a consistent assessment of underlying performance, the prospects for recovery are positive. It’s important to note that these losses, particularly those tied to market movements, can be reversed as market fundamentals improve. As market conditions stabilise, there’s potential for an unwinding effect on provisions and estimates made by banks in response to these market fluctuations.
Taking a short-term view might paint a less optimistic picture, but a longer-term perspective reveals a different story. The industry acknowledges the significance of immediate considerations while also recognising that fluctuations in financial performance are normal. Ultimately, a focus on the broader financial landscape, market fundamentals, and the trajectory of the banking sector’s underlying performance provides a more comprehensive understanding of the sector’s potential for resilience and recovery.
B&FT: With NPLs remaining at an unfavourable level, some have called for the securitisation of NPLs to give reprieve to the banks and also afford investors a new asset class. What is your position on this?
John Awuah (GAB CEO): There is already a market for securitisation, but the unique challenges we face in Ghana are tied to the inefficiencies within our legal regime. In contrast to other jurisdictions where loan recovery is facilitated by a more streamlined legal process, Ghana’s recovery process is often hindered by complexities. Unfortunately, our judicial system sometimes extends sympathy towards customers at the expense of lenders, leading to prolonged recovery timelines when cases are in court.
For instance, during the 2008 financial crisis in the US, millions of houses were put on the market within a short span without the need for court involvement. In Ghana, the process involves multiple stages, such as recovery, reserve pricing, and auctions. By the time a judgment is obtained, the asset’s value might have significantly deteriorated. This is why securitisation despite its potential to be a valuable approach in our country, is unlikely to take off until we can significantly reduce the time required to convert non-performing assets into cash.
B&FT: In the event that these legal challenges are resolved, there are concerns that securitisation might be too complex for our financial markets. What’s your take on this?
John Awuah: It’s important to note that investors don’t necessarily need to grasp every intricate detail of how a financial instrument operates. Investment advisory firms exist precisely to provide the right kind of guidance. In other parts of the world, individual investors don’t handle portfolio management.
An interesting revelation came during the DDEP, where some customers assumed that when they purchased T-Bills through a bank, the bank itself should be responsible for payments. They weren’t aware that they were actually lending money to the government, which would be responsible for repayment. This highlights the need to bolster the advisory aspect of the market. People should be well-informed about their rights and responsibilities.
The growth of the market doesn’t solely depend on retail investors but rather on the collaboration among market participants and operators – including banks, fund managers, and regulators – working in harmony to deepen the market’s overall efficiency. Addressing the market’s information inefficiency is an ongoing endeavour that we are committed to.
B&FT: In light of information inefficiency, doesn’t the continued growth in deposits, despite the DDEP, provide further evidence of this?
John Awuah (GAB CEO): On the contrary, one should consider the alternative options available to customers. The DDEP doesn’t strip customers of their funds; it merely offers them choices. In the face of uncertainty, where spending patterns have become unpredictable, individuals contemplate whether to hold onto their money or entrust it to a bank for safekeeping. The growth in deposits is influenced by a complex interplay of factors.
Customers’ decisions aren’t driven by recklessness. Amid heightened uncertainty, people exhibit prudent behavior by securing their funds. We’ve previously discussed the limited investment avenues and lack of diversified investment vehicles in our market compared to other regions. This emphasises the necessity to foster market depth.
Ultimately, the growth in deposits underscores the enduring confidence people have in banks as safe repositories for their funds. Despite ongoing challenges, this reaffirms the urgency of safeguarding and sustaining this trust. Notably, even during these trying times, banks have remained capable of meeting customer withdrawal demands.
B&FT: How well-prepared are the banks for the potential reversal of forbearance measures granted during the DDEP?
John Awuah: The relief measures were thoughtfully instituted by the regulator to serve a specific purpose. Banks required certain mitigations to actively participate in the debt exchange under the DDEP. It’s important to recognise that the DDEP is a long-term initiative. We don’t assume these reliefs will be in place indefinitely. Governor of the central bank, as well as the return of the cash reserve requirement to its pre-DDEP level, indicates a regulatory assessment suggesting banks may no longer need this specific relief.
Reliefs are temporary measures, not enshrined in law. Reviews are expected as conditions evolve. Therefore, we can anticipate ongoing evaluations and potential adjustments.
B&FT: What measures are banks taking to address the issue of NPLs?
John Awuah (GAB CEO): Non-performing loans (NPLs) pose a significant risk to the financial system. When banks extend loans, they expect to recover a portion of the amount lent, say 83 cedis out of 100 cedis, while accounting for a potential loss of 17 cedis. This 17 cedis represents a cost that banks consider when pricing their loan facilities. In essence, NPLs are akin to a cancer in the broader financial services sector, particularly for banks.
Lending rates are often discussed in comparison with neighboring countries like Nigeria and Côte d’Ivoire, but people tend to overlook the role of default rates. These countries have single-digit default rates, contributing to lower lending rates. We face an ecosystem problem in Ghana. It’s akin to a scenario where a friend borrows 200 cedis, promising to repay by month’s end, but fails to do so, leading to strained relationships. Banks experience a similar situation.
This issue is systemic, endemic, and even cultural. Our financial systems lack integration. For instance, someone might hesitate to receive mobile money on a specific number because they owe money and have no intention of repaying. This cultural issue extends to borrowing as individuals can default with one entity and borrow from another without consequences due to the absence of a comprehensive customer view.
Unlike elsewhere, where defaulting on rent impacts your credit, in Ghana, borrowing behavior is often siloed, making it challenging to assess creditworthiness. These systemic problems are evident in areas like the land title registry, where properties can change hands swiftly, affecting loan collateral.
Progress is being made, with the Ghana Card being a significant step forward. This card consolidates entitlements, including Social Security and tax records, streamlining access to financial services. While banks work internally to improve loan recovery, the broader ecosystem inefficiencies must be tackled. Lost court files, even involving substantial sums, underscore the need for robust systems.
Why do our neighbors fare better?
Francophone economies have long-integrated national IDs. In Nigeria, the Bank Verification Number (BVN) offers a consolidated view of an individual’s exposure within the banking system. Unlike us, where reporting to credit reference bureaus relies on individual bank compliance, a unified view would be more effective.
Advanced economies’ creditworthiness is not solely due to people’s virtue but stems from controls and consequences for breaches. “My credit” is a crucial concept there, and it’s where Ghana should aim – rewarding those who are creditworthy.
For instance, consider a case where someone visited the U.S. last year and attempted to rent a car with a debit card. He was refused because he wasn’t recognised by the system, highlighting the emphasis on credit cards as a measure of creditworthiness, unlike here where debit cards are used to indicate pre-loaded funds. If we want lending rates to drop and we are serious about curbing money laundering, then, this is where we should be moving.
B&FT: Banks have reported significant profitability, especially in the first half of the year. How can this momentum be sustained?
John Awuah (GAB CEO): Without a doubt, the past few months have been challenging due to headwinds that emerged around this time last year. Despite these challenges, the underlying performance of banks remains strong. However, it’s important to recognise that banks are intertwined with the broader economy. If the economy doesn’t respond positively, our ability to facilitate transactions is hindered. Although the banking system holds substantial funds, the absence of viable projects can impede progress. While the underlying performance of banks is robust, it’s intrinsically linked to the pace of economic recovery.
The onus rests on economic managers to stabilise market fundamentals like the exchange rate, inflation, and lending rates. A well-controlled economic environment leads to a prosperous economy. Therefore, the pertinent question is, “How can we achieve this control?” I am confident that we have capable individuals who can navigate this path successfully.
As banks, we naturally hold concern if the response to the debt exchange falls short of achieving the intended outcome of restructuring the economy and igniting an assertive recovery. Our current economic stance necessitates not just a regular recovery but an accelerated one, progressing geometrically to move us from our current state.
We hold hope that the response will be favorable, as we experienced when the first DDEP closed, resulting in a significant drop in Treasury Bill rates. Once this trend becomes visible, and risk factors are minimised, banks can continue extending facilities to both businesses and individuals.
B&FT: What specific measures are banks implementing to manage risks across various fronts?
John Awuah: Undoubtedly, there are risks and pressures that permeate various sectors. Within the banking system, a strong emphasis has been placed on enhancing efficiency – finding ways to accomplish more at lower costs. Continual exploration of alternative approaches is ongoing; for instance, shifting towards paperless operations whenever possible.
Three primary factors influence profit – revenue, cost, and impairment. When revenue is substantially affected, efforts are directed towards restoring revenue levels to match previous years.
Meanwhile, avenues for generating revenue have also been impacted. In the current climate, any prudent business person would thoroughly analyse before seeking financial assistance. Bank strategies are, to a large extent, shaped by the broader economic trajectory. With the presence of the IMF team, we anticipate a reinforcement of fiscal discipline that should alleviate the pressures typically associated with an election year.
B&FT: The yet-to-be operationalised Financial Stability Fund has been a prominent issue. How concerning is this?
John Awuah (GAB CEO): The non-operational state of the Financial Stability Fund has indeed been a significant concern. Particularly as it was one of the conditions we needed to meet prior to signing onto the DDEP, this matter has been of particular importance to the industry. Our analysis was based on the assumption that should any of our members require solvency or liquidity assistance, there would be a readily available avenue for relief. Unfortunately, the mechanism is not in place at this time.
However, we have gathered information that suggests the final structure of the framework is now ready. Unlike earlier in the year when only the World Bank had indicated its willingness to provide financial support, a few additional entities have expressed commitment. Thus, it appears that we are on track to have the Fund established by the end of September. This is the information we’ve received.
B&FT: In light of recent developments, how important is it to have stronger domestic banks?
John Awuah: It’s undeniable that a strong banking system is integral to economic development. Rarely does any economy experience growth solely through reliance on external banks. In every robust economy, there exists an indigenous bank or a consortium of banks that drive progress. This principle holds true across various countries.
B&FT: Regarding the recovery process, what factors should we be focused on, and are there specific initiatives GAB is implementing to facilitate this recovery?
John Awuah: The path to recovery is influenced by numerous factors, many of which fall beyond the scope of influence of an association like GAB or its individual members. Various experts are dedicated to addressing the fundamental aspects of recovery. We recognise that certain actions hold economic consequences, and as participants within the economy, we are vulnerable to impact just like any other entity. Our resilience will be tested by our capacity to withstand such impact and whether we can endure shocks similar to those experienced last year.
As an industry, we adopt a medium to long-term perspective, identifying prospects despite current challenges. Although these challenges align inconveniently with the upcoming elections and the associated impacts, we remain optimistic that those responsible for managing these matters will execute their roles effectively.
Our focus is not limited to the immediate term; we look ahead. If we can navigate through this period and maintain our current position over the next 12 months, barring further shocks, we can consider ourselves on a positive trajectory. Considering our relatively small population of around 35 million and the resources available to us, I don’t believe the recovery program is insurmountably vast. With the right expertise at the helm, I’m confident we can manage it. As an industry, we possess the necessary resilience to survive and contribute to anchoring the recovery.
This is why, even in challenging conditions, we’re collaborating with the Ministry of Finance to nurture initiatives like ‘YouStart’, designed to support young entrepreneurs. Our members are also actively engaged, particularly in empowering women and youth-owned businesses. We haven’t retreated, understanding our pivotal role. Inflation and certain factors are beyond our direct control, but as banks, we’re taking measures to endure and support the wheels of the economy.