IMF Report Examines Developments in Banking Sector in Ghana
IMF published its staff report on the last review of the Extended Credit Facility for Ghana. Extensive supervisory and regulatory reforms and interventions of problem banks by the Bank of Ghana (BoG) are boosting resilience in the banking sector. Over the past few years, BoG has resolved nine banks, approved three bank mergers, issued new regulatory directives, and overseen completion of the increased statutory capital for banks.
The report highlights that capital adequacy in the banking sector continues to improve (21.9% at the end of 2018, an increase of 330 basis points year-on-year) while the system-wide non performing loan (NPL) ratio (18.2% at the end of 2018) is steadily declining since its peak in April 2018, also supported by the adoption of the NPL resolution plan of BoG. Yet, loans classified as loss, as per the prudential classification rules of BoG, continue to comprise about 50% of the system-wide NPLs. Actions to alleviate balance-sheet constraints associated with the legacy NPLs should be stepped up. Addressing the NPL overhang is crucial to foster sustainable credit growth. The authorities are moving ahead with the implementation of their NPL resolution plan. Further write-offs of loans with no reasonable expectation of recovery, as per IFRS 9, is expected to free the balance sheets of banks. In addition, ongoing improvements in the insolvency framework and enforcement of creditor rights should enable more effective workouts of problem loans by banks.
Following the publication of the Capital Requirements Directive in July 2018, to align regulatory capital requirements with Basel II/III, BoG issued, among others, new Directives on Corporate Governance and Cyber and Information Security; a new guideline on the prevention of money laundering and terrorism financing; and draft requirements on the fitness and propriety of shareholders and bank management, financial holding companies, and mergers and acquisitions. The introduction of IFRS 9 (effective as of 2018), along with the ongoing enhancement of practices for risk-based supervision, the envisaged introduction of a Pillar 2 capital framework, and the new liquidity requirements, will further enhance the supervisory and regulatory framework in the financial sector in Ghana. The breadth and scope of the new requirements will require effective enforcement, while testing the absorption capacity of the banking sector.
The financial-sector reform agenda has broadened substantially over the course of the program, with important initiatives still in train. The closure of nine distressed banks and the initiation of forensic audits are crucial steps toward restoring confidence and strengthening accountability, though further actions remain necessary to address the remaining weaknesses. Bank-specific restructuring measures are needed to reduce fiscal risks going forward. Timely finalization of the regulatory reform agenda is critical to prevent recurrence of financial-sector fragility. Important progress has been made and implementing the pending initiatives—including a draft directive on risk management, implementation guidance on IFRS 9, and the envisaged introduction of a Pillar 2 capital framework—will further enhance the regulatory framework in Ghana. However, implementation will need to be carefully tailored to the absorption capacity and the resource constraints of the supervisory function of BoG. Enhanced risk-based supervision practices need to be combined with a more robust enforcement culture.
The report notes that the IMF mission welcomes the commitment of the authorities to further strengthen the Banks and Specialized Deposit-Taking Institutions (BSDI) Act, duly informed by lessons learned from the financial sector clean-up. Understandably, such reforms have been put on hold during the bank interventions but should be pursued at the earliest opportunity, as conditions continue to stabilize. Going forward, robust enforcement of prudential rules, combined with a greater scrutiny of the business models of specialized deposit-taking institutions, is needed to prevent the fragility from reemerging. The authorities have reiterated their resolve to complete the ongoing financial-sector reforms to support credit growth and financial inclusion. They are well aware that more work lies ahead, but strongly believe that actions taken so far have helped to lay a stronger foundation. The authorities remain confident that further financial weaknesses can thus be effectively prevented and financial institutions will be able to better support the development agenda post the Extended Credit Facility program.
Related Link: Staff Report
Keywords: Middle East and Africa, Ghana, Banking, NPLs, Capital Adequacy, Financial Stability, Pillar 2, IFRS 9, Basel III, BoG, IMF
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Scott Dietz
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Previous Article
EBA Issues Revised List of Validation Rules for ReportingNext Article
ESAs Publish Joint Committee Annual Report for 2018Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.