GHANA: An Introduction to Banking & Finance
Ghana’s economy has been in turmoil in recent years. The COVID-19 epidemic, together with the global energy crisis and the Russia-Ukraine war, exacerbated pre-existing fiscal weaknesses, such as excessive public debt and insufficient revenue mobilisation. By 2022, these difficulties had resulted in a serious macroeconomic crisis marked by currency depreciation, rising inflation (peaking at 54.1% in December of that year), declining GDP growth and the loss of investor confidence.
With unsustainable debt service obligations, the government initiated internal and external debt restructuring programmes. The Domestic Debt Exchange programme (DDEP) was launched in December 2022, converting about GHS137 billion in domestic bonds into new instruments with longer maturities and lower coupon rates. The DDEP provided fiscal relief by saving roughly GHS61.7 billion, or 30% of the affected debt, in 2023 alone. It also paved the way for the government to access a USD3 billion extended credit facility from the IMF, which was important for the funding it provided but perhaps even more so for its restorative effect on investor confidence.
Following the success of the DDEP, USD13 billion in external debt was restructured under a Eurobond exchange programme (EEP) that was launched in late 2024. Under the EEP, bondholders were given two choices: a “PAR Option” with no nominal haircut but lower interest rates (1.5%) and longer maturities (up to 2037), or a “DISCO Option” with a 37% nominal haircut, higher interest rates (5–6%), and shorter maturities (2029–2035). Like the DDEP, the EEP has also been a success, and it is projected to save USD4.3 billion in debt service costs throughout the three-year IMF programme while also decreasing the primary debt stock by USD5 billion.
Tighter monetary policy and more stable currency rates have also reduced inflation from its peak of 54% in 2022 to 20.4% by August 2024. The African Development Bank (AfDB) predicts a further decline in inflation to 11.9% by 2025, with growing food costs potentially causing issues. The AfDB also forecasts that GDP growth will accelerate to 3.4% in 2024 and 4.6% in 2025 as macroeconomic conditions stabilise.
Regulatory Reforms Aimed at Stabilising the Banking Sector
The banking sector was hit hard by the challenging macroeconomic conditions and the debt restructuring programmes. Banks faced significant losses and undercapitalisation as a result of the debt structuring and rising non-performing loans (NPLs). In order to help restore stability in the banking sector, the Bank of Ghana (BoG) introduced some important measures. These included interim regulatory forbearance policies such as decreasing capital adequacy ratio (CAR) requirements from 13% to 10% and allowing banks to distribute impairment losses over three years in order to relieve pressure on the banking industry generated by the debt restructuring initiatives.
At the same time, the BoG intensified supervision and required banks to recapitalise to meet minimum capital adequacy requirements by 2025. To support their recapitalisation efforts, the BoG established the Ghana Financial Stability Fund in conjunction with the Ministry of Finance. This fund has offered liquidity assistance to banks, specialised deposit-taking institutions, and non-banking financial institutions as part of a larger strategy to strengthen the financial sector, which focuses on rebuilding buffers, improving governance and phasing out temporary regulatory forbearance measures implemented during the crisis. These measures have helped banks manage their liquidity constraints, but as the economy recovers they are progressively being phased out to get CAR levels up to pre-debt exchange programme levels.
The BoG also recently established new cash reserve requirements (CRRs). The new requirements, which took effect in April 2024, tie CRR to loan-to-deposit ratios (LDRs). Banks with higher LDRs must now maintain lower CRRs of 15%, whereas those with lower LDRs face harsher reserve limits of up to 25%. While the change is meant to encourage banks to lend more, given current macroeconomic conditions and other issues, such as rising NPLs, the IMF is concerned that it may have unforeseen counterproductive implications, such as tighter credit conditions.
Technological Innovation: The e-Cedi Pilot
In conjunction with these legislative reforms, the BoG has also been pursuing a progressive digital transformation agenda. An important part of this agenda is the e-Cedi, a central bank digital currency that is intended to modernise payment processes and increase financial inclusion. The e-Cedi pilot project report issued by BoG last year indicated that the pilot was a success. The report also noted that the pilot revealed promising online and offline capabilities in rural regions with poor internet connectivity. Additionally, results from cross-border payment testing with Singapore demonstrated its potential to facilitate regional trade within the African Continental Free Trade Area (AfCFTA). These results suggest that the e-Cedi, which is scheduled to be launched before the end of 2026, could provide the most secure, efficient and inclusive digital payment option for businesses and individuals.
The Pan-African Payment and Settlement System
Ghana recently joined the Pan-African Payment and Settlement System (PAPSS), which was launched in early 2022 by Afreximbank in association with the AfCFTA Secretariat. PAPSS, which allows for the use of local currencies for cross-border payments throughout Africa, is a potential game-changer for intra-African trade. As more countries and banks become members and use the platform, it is anticipated that PAPPS will simplify funds transfer across the continent, fostering greater economic integration and trade growth.
Increasing Financial Inclusion Through Innovation
Ghana’s fintech sector has continued to thrive and serve as a catalyst for greater financial inclusion and innovation. In Q1 2024, fintech transactions increased by 33.4% to GHS576.03 billion, demonstrating the sector’s tremendous expansion. Regulatory sandboxes and other initiatives have allowed companies to test new products in controlled settings, promoting innovation in the field. Despite this progress, the sector continues to face challenges such as limited access to financing. Cybersecurity vulnerabilities also pose a hazard as digital transactions grow dramatically.
A Focus on Climate-Related Risks
The BoG issued the Climate-Related Financial Risk Directive late last year. This directive requires banks to incorporate climate-related risks into their risk management frameworks across the credit, market, liquidity, and operational domains. Banks were required to submit their climate-risk mitigation plans to BoG in January of this year, and, going forward, they will also be required to submit quarterly progress reports to the BoG to ensure accountability as they implement their plans.
The ultimate aim of the directive is to ensure that Ghana’s banking industry’s practices reflect the goals of the Paris Agreement and the Sustainable Development Goals (SDGs). Achieving this laudable aim will require a major investment in capacity building and data collection that will take time. However, once fully implemented, the directive could establish Ghanaian banks as a regional leader in sustainable finance.
Opportunities and Challenges
Ghana’s banking sector is at a pivotal moment, balancing the challenges of recovery with the drive for innovation and modernisation. The DDEP and Eurobond exchange programmes have brought significant fiscal relief to the country, but at a sizeable cost to bondholders and financial institutions. The gradual removal of regulatory forbearance measures, combined with reforms such as modified CRRs, is intended to restore stability and resilience. Notwithstanding the progress made over the last couple of years, banks still have much to contend with as they confront tighter liquidity, recapitalisation targets and the need to rebuild investor trust. Those institutions that are able to successfully navigate these challenges and modernise though innovation will emerge more resilient, sustainable and competitive.
Ghana’s fintech sector on the other hand, has continued to thrive, innovating and increasing financial inclusion despite the macroeconomic and other challenges. Digital innovations like PAPSS and the e-Cedi provide opportunities for greater financial inclusion and efficiency. BoG’s progressive, climate-focused risk management requirements have the potential to establish Ghanaian banks as continental leaders in sustainable finance. As the economy stabilises and banks build the resilience required to overcome the macroeconomic and financial challenges, the banking sector seems set to emerge financially stronger and more innovative, inclusive and competitive.