IMF Report Examines Developments in Banking Sector in Ghana

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