Att_6_-FINSSP_II_FINAL_June_16_2011.pdf

MINISTRY OF FINANCE AND ECONOMIC PLANNING

FINANCIAL SECTOR

STRATEGIC PLAN II

(FINSSP II)

Republic of Ghana

JUNE 2011

FOREWORD BY THE MINISTER OF

FINANCE AND ECONOMIC

PLANNING

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TABLE OF CONTENTS

FOREWORD BY THE MINISTER OF FINANCE AND ECONOMIC PLANNING ......I

LIST OF ACRONYMS AND ABBREVIATIONS .............................................................. IV

EXECUTIVE SUMMARY ....................................................................................................VII

ES 1.0 BACKGROUND ................................................................................................................................. VII ES 2.0 THE FINANCIAL SECTOR IN GHANA ....................................................................................... VII ES 3.0 VISION FOR THE FINANCIAL SECTOR ....................................................................................XIV ES 4.0 RECOMMENDATIONS ................................................................................................................... XV ES 5.0 IMPLEMENTATION AND MONITORING............................................................................................ XXIII

CHAPTER 1: INTRODUCTION TO FINSSP II

1.1 BACKGROUND

1.2 THE ROLE OF THE FINANCIAL SECTOR IN THE GHANAIAN ECONOMY

1.2.1 The Banking Industry

1.2.2 Rural and Community Banks

1.2.3 The Securities Industry

1.2.4 The Insurance Industry

1.2.5 The Pension Industry

1.2.6 Non-Banking Industry

1.2.7 Micro-Finance Institutions

1.3 RECENT MACRO-ECONOMIC DEVELOPMENTS

1.4 THE ENABLING ENVIRONMENT FOR FINANCIAL SECTOR STRATEGIES

1.4.1 GHANA’S CURRENT ECONOMIC DEVELOPMENT STRATEGIES

1.4.2 FINANCIAL SECTOR STRATEGIES FOR ECONOMIC DEVELOPMENT AND POVERTY

ALLEVIATION

1.4.3 COMPLEMENTARITIES BETWEEN GOVERNMENT’S ECONOMIC STRATEGY AND

GOVERNMENT’S FINANCIAL SECTOR STRATEGY

1.5 RECENT GLOBAL DEVELOPMENTS

1.6 STRUCTURE OF FINSSP II DOCUMENT

CHAPTER 2: THE FINANCIAL SECTOR IN GHANA

2.1 INTRODUCTION

2.2 THE SECURITIES INDUSTRY

2.2.1 MARKET REGULATION

2.2.2 KEY CHALLENGES

2.2.2 THE GHANA STOCK EXCHANGE

2.2.3 THE BOND MARKET

2.2.4 THE MONEY MARKET

2.2.5 INVESTMENT MANAGEMENT

2.3 THE PENSION INDUSTRY

2.3.1 TRUSTEES AND CUSTODIANS

2.4 INSURANCE INDUSTRY

2.5 CROSS-COUNTRY COMPARISON OF SECURITIES AND INSURANCE INDUSTRIES IN

AFRICAN AND NON-AFRICAN COUNTRIES

2.6 THE BANKING INDUSTRY IN GHANA

2.6.1 AN OVERVIEW OF THE MAIN BANKING SECTOR

2.6.2 PROFITABILITY AND EFFICIENCY

2.6.3 CHALLENGES AND SPECIFIC ISSUES

2.6.4 CROSS-COUNTRY COMPARISON OF BANKING IN AFRICAN AND NON-AFRICAN

COUNTRIES 22

2.7 DEVELOPMENT FINANCING

2.7.1. AGRICULTURE

2.7.2 HOUSING FINANCE

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2.8 RURAL AND COMMUNITY BANKS

2.9 SAVINGS AND LOANS COMPANIES

2.10 CREDIT UNIONS

2.11 NON-BANK FINANCIAL INSTITUTIONS

2.11.1 LEASING COMPANIES

2.11.2 VENTURE CAPITAL AND PRIVATE EQUITY FUNDS

2.12 MICRO-FINANCE INSTITUTIONS

2.12.1 SUSU COLLECTORS AND SUSU COMPANIES

2.12.2 Financial Non-Governmental Organizations (FNGOs)

2.12.3 Money Lending

2.13 ANTI-MONEY LAUNDERING AND COUNTER TERRORISM FINANCING

2.14 STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS OF THE FINANCIAL

SYSTEM

2.14.1 STRENGTHS OF THE CURRENT FINANCIAL SYSTEM

2.14.2 WEAKNESSES OF THE CURRENT FINANCIAL SYSTEM

2.14.3 OPPORTUNITIES

2.14.4 THREATS

CHAPTER 3: THE VISION FOR THE FINANCIAL SECTOR

3.1 THE VISION FOR GHANA

3.2 OBJECTIVES AND STRATEGIC INITIATIVES

CHAPTER 4: RECOMMENDATIONS

4.1 SECURITIES INDUSTRY

4.1.1 GHANA STOCK EXCHANGE

4.1.2 THE BOND MARKET

4.1.3 THE MONEY MARKET

4.1.4 INVESTMENT DEALERS

4.2 THE PENSION INDUSTRY

4.3 THE INSURANCE INDUSTRY

4.4 THE BANKING INDUSTRY

4.5 PAYMENT AND SETTLEMENT SYSTEMS

4.6 ANTI-MONEY LAUNDERING AND COUNTER TERRORIST FINANCING

4.7 RURAL AND COMMUNITY BANKS

4.8 SAVINGS AND LOANS COMPANIES

4.9 CREDIT UNIONS

4.10 MICRO-FINANCE

4.10.1 SUSU

4.10.2 Money Lending

4.11 DEVELOPMENT FINANCING

4.11.1 AGRICULTURE

4.11.2 HOUSING FINANCE

4.11.3 THE VENTURE CAPITAL TRUST FUND

4.11.4 EXIMGUARANTY CO. LTD

4.12 CORPORATE GOVERNANCE

4.13 GENERAL LEGAL AND REGULATORY FRAMEWORK

4.14 THE BANK OF GHANA

4.15 THE MINISTRY OF FINANCE AND ECONOMIC PLANNING

4.16 TRAINING AND PROFESSIONAL DEVELOPMENT

4.17 FINANCIAL LITERACY AND PUBLIC AWARENESS

CHAPTER 5: IMPLEMENTATION FRAMEWORK

5.1 INTRODUCTION

5.3 PERFORMANCE MONITORING

5.4 COMMUNICATION PROGRAM

APPENDIX: MATRIX OF THE STRATEGIC INITIATIVES AND THE

CORRESPONDING RECOMMENDATIONS

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LIST OF ACRONYMS AND

ABBREVIATIONS

ACH Automated Clearing House ARB Association of Rural Banks ASSFIN Association of Financial Non-Governmental Organizations BCBS Basel Committee on Banking Supervision BCEAO Banque Centrale des États de l'Afrique de l'Ouest (Central Bank of West

African States) BoG Bank of Ghana BSD Banking Supervision Department BRVM Bourse Régionale des Valeurs Mobilières CID Criminal Investigations Department CPSS Committee on Payment and Settlement Systems CSD Central Securities Depository CUA Credit Union Association DFI Development Finance Institution ECOWAS Economic Community of West African States FATF Financial Action Task Force FDI Foreign Direct Investment FIC Financial Intelligence Centre FINSAP Financial Sector Adjustment Program FINSSP Financial Sector Strategic Plan FNGO Financial Non-Governmental Organization FSB Financial Services Board FSD Financial Sector Division of MOFEP GCSCA Ghana Cooperative Susu Collectors Association GDP Gross Domestic Product GHAMFIN Ghana Microfinance Institutions Network GHIPSS Ghana Interbank Payment and Settlement Systems GIPC Ghana Investment Promotion Center GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (German

Company for International Cooperation) GoG Government of Ghana GNPC Ghana National Petroleum Corporation GPRS Ghana Poverty Reduction Strategy GREDA Ghana Real Estate Developers Association GSE Ghana Stock Exchange HFC Home Finance Company HIPC Heavily Indebted Poor Country IAASB International Auditing and Assurance Standards Board IAIS International Association of Insurance Supervisors v

IASB International Accounting Standards Board IFC International Finance Corporation IFSC International Financial Services Centre IMF International Monetary Fund IOSCO International Organization of Securities Commissions IPO Initial Public Offer LDM Licensed Dealing Member LRED Local/Regional Economic Development MASLOC Microfinance and Small Loans Centre MEST Ministry of Environment, Science and Technology MFI Micro Finance Institution MiDA Millennium Development Authority MLNR Ministry of Lands and National Resources MOE Ministry of Energy MOFEP Ministry of Finance and Economic Planning MOH Ministry of Health MOT Ministry of Transport MOTI Ministry of Trade and Industry MRH Ministry of Roads and Highways MTDPF Medium Term Development Policy Framework MTEF Medium Term Expenditure Framework MWHWR Ministry Works, Housing and Water Resources NBC National Banking College NBFI Non- Bank Financial Institution NIC National Insurance Commission NPRA National Pension Regulatory Authority NGO Non-Governmental Organization NRL National Reconstruction Levy NRGP Northern Rural Growth Program OECD Organization for Economic Cooperation and Development OMO Open Market Operations OTC Over the Counter PWC PriceWaterhouseCoopers PSBR Public Sector Borrowing Requirement PD Primary Dealership PPPs Public Private Partnership PSDS Private Sector Development Strategy RCB Rural and Community bank RTGS Real Time Gross Settlement System SEC Securities and Exchange Commission S&L Savings and Loan SIL Securities Industry Law SME Small & Medium Enterprise SSNIT Social Security & National Insurance Trust SWF Sovereign Wealth Fund TIPCEE Trade and Investment Program for A Competitive Export Economy UEMOA Union Economique et Monétaire Ouest Africaine (West African Economic vi and Monetary Union) UGBS University of Ghana Business School VCFC Venture Capital Finance Company VCTF Venture Capital Trust Fund vii

EXECUTIVE SUMMARY

ES 1.0 BACKGROUND

Ghana’s financial sector has undergone extensive reforms over the last two decades. As part of the Financial Sector Adjustment Programs (FINSAP I and II) implemented from the late 1980s through the mid-1990s, Ghana’s financial sector, then dominated by state-owned banks and the allocation and pricing of credit by government, was gradually liberalized.

FINSAP I and II focused on restructuring of financially-distressed banks, improving the regulatory and supervisory framework, and promoting non-bank financial institutions. Results associated with FINSAP include the privatization of the banking sector and increased competition resulting from the licensing of several new banks. A more diversified financial sector began to emerge with the establishment of non-bank financial institutions such as leasing companies, mortgage finance companies, finance houses and savings and loans companies. A more organized capital market also began to develop with the establishment of the Ghana Stock Exchange in 1990 with associated institutions such as investment dealers, investment advisors and collective investment schemes.

In spite of these positive results, by the end of FINSAP I and II it was generally felt that a lot more remained to be done to deepen and broaden the financial sector. Identified problems included high and uncertain interest rates, poor access to credit by small and medium scale enterprises (SMEs), lack of a long-term debt market, limited secondary market for debt and equity instruments, inadequate financial innovation, regulatory inefficiencies, outdated laws such as the company and bankruptcy laws, and the inefficiency of registries of documents supporting financial intermediation

In the early 2000s, the Government developed the Financial Sector Strategic Plan (FINSSP) to address these weaknesses in the financial sector. FINSSP, now called FINSSP I, was adopted in 2003 for implementation through 2008. It contained 98 recommendations for reforming and strengthening the financial sector. As at the end of 2008, an estimated 80% of the recommendations of FINSSP I had been implemented. An impact assessment of FINSSP I conducted by PriceWaterhouseCoopers showed positive results.

This document is Ghana’s Financial Sector Strategic Plan II (FINSSP II) to serve as the blueprint for Ghana’s financial sector development to be implemented over a five-year period 2011 – 2015. The document has been finalized after extensive consultation with the regulatory agencies, financial institutions and other public and private sector stakeholders.

ES 2.0 THE FINANCIAL SECTOR IN GHANA

Since the extensive reforms of the financial sector, the sector has seen rapid development in terms of growth in the number and variety of financial institutions. The following main actors were in place in the Ghanaian financial sector as at December 31, 2010:

• Capital Market : A stock exchange with 35 listed companies, stock brokerage companies, investment advisors, collective investment schemes)

• Banks (26)

• Rural and Community Banks (135) viii

• Insurance Companies: Life insurance companies (17) , Non-life insurance companies (23), Reinsurance companies (2)

• Pension Funds and Provident Funds

• Non-bank financial institutions: Finance Houses (22), Leasing and Hire Purchase

Companies (4), Venture Capital Funds (5), Mortgage Finance Companies (1), Savings and Loan Companies (19), Credit Unions(500 approximately)

• Other Microfinance Institutions: Financial NGOs, Susu Collectors – about 4,000, of which approximately 1,200 are Susu companies, micro-insurance companies, micro-leasing Companies

The Banking Industry

The main financial institutions in the economy are the banks. They are the main mobilizers of funds, providers of risk management services and financiers of medium- and large-scale enterprises and government. It is through them that finance makes its major contribution to sustained economic growth, development and stability in the country. The banking industry is regulated by the Central Bank (i.e. the Bank of Ghana).

Banks also play an important role in ensuring an efficient and effective payment system and transaction processing. While playing the foregoing role the banking industry is also the medium through which monetary policy is implemented by the central bank. The effectiveness and efficiency with which the Central Bank is able to implement monetary policy depends on the character of the banking industry. In this respect, the banking system in Ghana has been less than effective in the transmission of monetary policy as reflected in muted response of banks to changes in the policy rate of the Bank of Ghana, especially when it involves a lowering of lending rates.

Ghana’s banking industry is dominated by universal banks whose share of the total banking assets is 90%. The industry has seen rapid growth over the years. Features of this rapid growth include the following:

• the number of banks has increased from 16 to 26 in the last decade alone (2000-2010);

• total shareholders capital for the industry has almost tripled in the last four years

• The banking industry is profitable and the return on equity is high.

Rural and Community Banks

In addition to the main banks, 135 Rural and Community Banks (RCBs) also exist in the country. Some of them have existed since the 1970s. Their agencies number about 560 and are spread across the country. RCBs account for roughly 4 percent of the total assets of the Ghanaian banking sector. RCBs are a positive intervention in providing the needed banking services in the rural areas. They complement the services of the main banks. The majority of them are small. RCBs are generally owned by members of the community in which they operate and cannot have clients beyond a certain catchment area. To ensure that no single individual controls RCBs, individual’s ownership is limited to 30 percent of paid up capital.

Finally, the banking system also includes 19 Savings and Loan companies, who are licensed to accept deposits and make loans but with lower capital requirements and a restriction to domestic financial transactions only. The savings and loan companies normally cater to the lower end of the market including the informal sector.

The Securities Industry

While banks only provide loans (i.e. debt capital) to firms for investment, the securities industry enables firms to acquire equity and debt capital to finance their operations. In so doing, the securities industry helps businesses to achieve appropriate mix of debt and equity capital. The Ghana Stock Exchange has been operating since 1990 and as at December 2010 had 35 listed companies with total market capitalization of GHS20.2 billion.

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The Insurance Industry

The insurance industry is another growing sub-sector of the Ghanaian financial sector. The industry is made up of 23 Non-Life insurance companies, 17 Life insurance companies and 2 Reinsurance companies. The bulk of the business is in non-life insurance.

The insurance industry in Ghana is regulated by the National Insurance Commission

(NIC).

The Pension Industry

The Social Security and National Insurance Trust (SSNIT) is the state pension scheme in Ghana. Besides SSNIT, a few private pension schemes sponsored by employers exist. The current pension law provides for a three-tier system as follows:

1. Tier 1: Mandatory defined benefit public social security scheme administered by

SSNIT

2. Tier 2: Mandatory defined contribution and privately-managed occupational pension scheme;

3. Tier 3: Voluntary occupational and personal private pension scheme.

The informal sector falls under Tier 3. The pension industry in Ghana is regulated by the National Pensions Regulatory Authority (NPRA)

Non-Banking Financial Institutions

Non-Bank Financial Institutions (NBFIs) have increased the breath and diversity of Ghana’s financial sector in recent times. NBFIs include finance houses, mortgage finance companies, leasing and hire purchase companies, venture capital and private equity funds, credit unions. Some state-sponsored development finance companies such as Eximguaranty Company and Export Finance Company are also NBFIs. NBFIs in Ghana generally serve the informal sector, which constitutes about 80% of the Ghanaian economy. Total assets of the NBFIs in the country at the end of 2010 amounted to 5.6% of the total assets of banking and non-bank financial institutions.

Micro-Finance Institutions

Microfinance is access to financial services by poor households. Microfinance institutions (MFIs) are institutions whose core business is the delivery of microfinance services. In Ghana many of the NBFIs mentioned above are MFIs They comprise: 1) Susu Collectors and Companies, 2) Financial NGOs, 3) Micro-insurance companies, 4) Micro-leasing Companies, and 5) Micro-finance units of the main stream banks. Savings and Loans Companies, Rural and Community Banks, and Credit Unions are also active providers of microfinance services.

MFIs provide services to the informal, semi-formal and formal sectors of the economy, using approaches different from those of the mainstream finance institutions. Their services are targeted to very small (micro), small and medium-sized enterprises as well as the general population who live and work in the neighbourhoods in which they operate.

It is estimated that there are more than 4,000 Susu collectors in Ghana mobilizing savings of about GHS230 million at any point in time. Services range from individual freelance Susu collectors serving a handful of clients to large agencies that serve close to 10,000 clients. In recent years many Susu companies that provide Susu services have been established. The Susu companies have been intermediating as small savings and loan companies.

Susu members have a networking and self-monitoring body called the Ghana Cooperative Susu Collectors Association (GCSCA). The GCSCA was established in 1994 and comprises individual freelance Susu collectors, until 2006, when registered enterprises and companies were admitted into membership.

KEY CHALLENGES

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The Banking Industry

Two of the major factors that have hampered Ghana’s aspirations for faster economic development during the past three decades are: 1) the banking system and 2) savings culture.

The Ghanaian banking industry is concentrated. However, the degree of concentration has been declining over the years. Based on the high percent of assets owned by the few largest banks even now, it has been suggested that the Ghanaian banking industry is oligopolistic implying the ability of banks in the country to set high interest rates.

The weaknesses of the banking industry in Ghana include:

• Low banking depth.

• Low ratio of private sector credit to GDP (25% in 2010).

• Low access to banking, especially by SMEs and the informal sector.

• High lending rates

• Negative real deposit rates

Challenges and specific issues of concern include:

• Bringing down the high lending rates: The spread between borrowing and lending rates in Ghana has remained very wide for a long time. This wide spread between borrowing and lending rates is one of the key factors that have hampered Ghana’s aspirations for faster economic development. Reforms in Ghana’s financial sector have not led to significant restructuring, thus leaving the sector incapable of leading private sector development.

• Increasing access to banking, especially by SMEs and the informal sector

• Achieving growth of the banking industry and economy by improving the banking system’s ability to intermediate funds. This includes building the information infrastructure (credit bureaux, address system, identification cards) and addressing the negative real deposit interest rates

• Building regulatory capacity

• Reducing financial illiteracy among the general public

• Enhancing cross-country regulation of banks

Rural and Community Banks

Constraints to the growth of RCBs include lack of information and communication technology infrastructure, inadequate internal controls, and lack of capacity by the ARB Apex Bank to supervise RCBs. Issues confronting RCBs include lack of business activity in some of the rural areas which impedes the mobilization of funds and lending. As a result, some RCBs are not profitable and therefore not sustainable. Calls for mergers as a way to attain sustainability have been made.

Poverty and lack of education are also problems associated with the rural areas and these inhibit the deepening of financial intermediation. Members of rural bank boards of directors are mainly appointed at local level (with the local chief being the most eligible candidate). They therefore do not necessarily possess the skills and competences required for these roles. This presents a serious governance issue.

The Securities Industry

The key challenges of the securities industry are:

• Regulatory Capacity: The SEC needs more accountants, lawyers, economists, finance experts, etc. Poor remuneration has made the SEC an unattractive destination for these professionals.

• Persistent underfunding of the SEC

• Training and capacity development

• Outdated securities industry law xi

• Undercapitalized market operators

The capital of many market operators is small. Higher capital will enable them carry out more market activities such as firm commitment underwriting and to act as market makers.

The investment management industry in Ghana is relatively new. Investment management funds in Ghana consist of funds managed by SSNIT, provident and endowment funds, collective investment schemes such as unit trusts, mutual funds and privately managed funds including funds managed under Tier 2 and Tier 3 of the recently promulgated pension law. The SEC licenses and regulates the fund management industry.

Currently, the GSE is not integrated with any other market. Discussions among the three ECOWAS exchanges (Ghana, Nigeria and the BRVM) about integrating the exchanges are converging to a single market whereby brokers on the various exchanges who meet additional requirements can trade on all three ECOWAS exchanges.

The Bond Market

Worldwide, the bond market is an important segment of the capital market and provides borrowers with long-term capital. To the investor, bonds provide a relatively more secure investment compared to equity. Yet in Ghana, there is currently only one publicly traded corporate bond listed on the GSE. A number of Government 3-year and 5-year bonds are outstanding, and government continues to issue the same periodically. All government bonds are publicly traded, but in all cases hardly any secondary trading takes place.

The immediate concerns for the bond market are: i) promoting issue of corporate bonds, and ii) increasing secondary trading in both corporate and government bonds.

The Money Market

The money market involves debt instruments with a maturity of one year or less. Money market instruments in Ghana include: the interbank market, treasury bills, repurchase agreements, commercial paper and bankers acceptances. Although the interbank and treasury bill markets are active, there is virtually no activity in private sector money market instruments such as commercial paper. Developing and broadening the money market can help lay the groundwork for subsequent issues of medium- and long-term debt instruments.

Insurance Industry

Insurance market penetration in Ghana is low. Identified challenges include:

• Increasing the capacity of insurers to do more of all classes of business.

• Enhancing relationships with customers

• Moving towards risk-based supervision

• Enhancing the solvency of insurers (capital adequacy, liabilities relative to assets and capital, investment income, etc)

The Pension Industry

The potential impact of the new pensions regime on Ghana’s financial sector is huge. The challenges include funding needs of the nascent NPRA and restructuring SSNIT to make it more efficient and self-sustaining.

Payment and Settlement System

The Ghana Interbank Payments and Settlement System (GhIPSS) includes: 1) The National Switch (the Common Platform), 2) Biometric Smart Card, 3) Cheque Clearing, 4) Codeline Cheque Truncation, 5) Real Time Gross Settlement System (RTGS), and, 6) Automated Clearing House (ACH). The system provides Ghana with an efficient, robust and modern payment system infrastructure.

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The GhIPSS has the potential to significantly reduce the usage of cash for business, transactions and extend services to the unbanked and underbanked segments of the population.

The key challenges are:

• Expanding use of e-Zwich

• Educating the public

Development Financing

Development finance involves government sponsored institutional arrangements for providing debt and equity financing to critical sectors of the economy. There are no pure development finance companies operating in Ghana presently. Banks that started as purely development finance companies currently operating in Ghana are the Agricultural Development Bank and the National Investment Bank. However, they have all been licensed as universal banks and operate as such.

There are a number of non-bank development finance institutions such as Eximguaranty Company, Export Finance Company, Export Development and Investment Fund and Venture Capital Trust Fund. However, government has not articulated a clear vision for these institutions and funding is erratic. In addition, there are critical sectors such as housing and agriculture that are unable to access appropriate financing from the banking system and therefore require some development finance solutions.

Credit Unions

Credit Unions in Ghana are currently regulated by the Co-operative Societies Decree 1968. This law governs 17 co-operative bodies of which the credit unions are only one. The main challenge is the lack of laws specific to credit unions

Leasing Companies

Financial institutions in Ghana dedicated to leasing started with the Ghana Leasing Co.

Ltd in 1991. Before then, there was no independent financial institution focusing solely on leasing. Leasing that has developed in some African countries, including Ghana, often were jump-started with assistance from the International Finance Corporation (IFC) and other donors. Ghana has four independent leasing companies and many of the universal banks also have leasing units. The challenges facing the industry include:

• High cost of funds

• Unavailability of medium- to long-term funds

Venture Capital and Private Equity Funds

Ghana’s nascent venture capital and private equity funds industry is operated by a few venture capital and private equity funds. The private equity funds in Ghana are owned by local or foreign institutional and individual investors.

Generally speaking, local investors do not find investment in venture capital and equity funds attractive because of their short investment horizon and liquidity needs. As a result, Venture Capital and Equity Funds are mostly set up by international development finance institutions such as IFC and Netherlands Development Finance Company (FMO).

Commercially-minded foreign investors with large funds have not been attracted into the Ghana venture capital and equity funds market yet.

To promote a vibrant venture capital industry that provides equity and quasi-equity funding to SMEs, the Government in 2004 set up the Venture Capital Trust Fund (VCTF).

The Government’s vision in setting up the VCTF was to promote a venture capital industry by providing matching funds to private sector venture companies and generous tax incentives. The VCTF has been successful in jump starting five new venture capital finance companies in Ghana.

The major challenge is that the initial source of funds earmarked for the VCTF (i.e. 25% of the National Reconstruction Levy for two years) no longer exists and the VCTF has used xiii up its initial endowment. There is a need for government to review the mandate VCTF and take a firm decision on its future course.

Micro-Finance Institutions

Challenges of microfinance institutions include:

• Pervasively weak institutional capacities

• Weak ownership and governance

• Maintaining financial sustainability

• Plethora of government programs that are subsidized

Susu Collectors and Companies

The main challenge faced by the Susu collectors and Susu companies is the lack of a regulatory framework for the subsector and poor investor protection.

Financial Non-Governmental Organizations (FNGOs)

Financial Non-Governmental Organisations (FNGOs) are micro finance providers that provide micro credit to the very small entrepreneurs on a non-profit basis. Apart from credit, FNGOs provide economic services such as development of income generating activities, and social support services (such as gender-based and faith-based services) to their clients. FNGOs play an important role in financial intermediation among those unable to meet the requirements of the formal banks in accessing financial services. Their services are tailor-made to fit the business needs of clients and prospective clients.

The challenges facing FNGOs include:

• Complying with stringent legal and regulatory requirements

• Balancing between their social mission of outreach to the poor and the need to achieve financial stability.

Money Lenders Association

Money lenders are found all over Ghana. Some of them are members of the Ghana Money Lenders Association. Money lenders come under the Borrowers and Lenders Act, 2008 (Act 773). Although there is Money Lenders Association, the subsector lacks a clear regulatory framework and supervision.

Anti-Money Laundering and Counter Terrorism Financing

The Financial Intelligence Centre (FIC) is a corporate body established by the provisions in the Anti-Money Laundering Act, 2008 (Act 749). The objects of the centre include assisting in the identification of proceeds of unlawful activity and the combat of money laundering activities. Countering terrorism financing is another activity under the FIC.

The accountable institutions that the Act provides for includes: banks, non-bank financial institutions, insurance companies, securities and brokerage firms, car dealers, dealers in precious metals and precious stones and Real estate developers.

The challenges are:

• Finalization of the National strategy for Countering of Money Laundering and

Financing of Terrorism.

• Budgetary allocation for the setting up of FIC, including adequate office accommodation, public education, computer hardware and software and appropriate staffing.

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ES 3.0 VISION FOR THE FINANCIAL SECTOR

The FINSSP II vision for the Ghanaian financial sector does not change much from the vision expressed in FINSSP I in broad terms. In FINSSP II however, the objectives are to consolidate, deepen and expand the gains made in implementing FINSSP I.

The Vision

The vision of FINSSP II is:

A financial sector that is stable and efficient in the mobilization and allocation of funds, fully integrated with the global financial system and supported by a regulatory and supervisory system that promotes a high degree of confidence.

FINSSP II is designed to translate this vision into reality.

Objectives and Strategic Initiatives

To realize the above vision, the six key objectives that were identified in FINSSP I remain valid under FINSSP II and will be pursued. To achieve each objective, a number of strategic initiatives that have been designed to facilitate achievement of the objective are indicated.

The key objectives of FINSSP II and the strategic initiatives are the following:

1. Objective 1: To be the preferred source of finance for domestic companies

Strategic Initiatives:

1.1. Enhancing the efficiency of the fund-raising process

1.2. Facilitating the environment for the development of venture capital and private equity industry

1.3. Developing a bond market with a strong corporate bond component

1.4. Developing the mortgage finance market to ensure that Ghana achieves a higher rate of home ownership

1.5. Supporting improved secondary market liquidity

1.6. Facilitating the environment for development financing to support SMEs in critical sectors particularly agriculture and agribusiness.

2. Objective 2: To promote efficient savings mobilization

Strategic initiatives:

2.1 Enhancing vehicles to mobilize informal sector savings.

2.2 Providing a framework for insurance and pensions industries to mobilize and invest long-term funds

2.3 Promoting sound corporate governance to boost investor confidence

3. Objective 3: To enhance the competitiveness of Ghana’s financial institutions within a regional and global setting

Strategic initiatives:

3.1 Establishing standards of practice within the financial sector that are internationally accepted.

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3.2 Reducing dependence on donor flows in favour of a market-based sovereign access to offshore financing.

3.3 Pursuing possibilities for creating an International Financial Services Centre in Ghana

3.4 Restructuring the Ghana Stock Exchange to be regionally competitive and operated with a commercial orientation.

4. Objective 4: To ensure a stronger and more facilitative regulatory regime

Strategic Initiatives

4.1. Developing structures for a stronger enforcement of regulations

4.2. Establishing regulatory parity between financial institutions conducting similar market activities

4.3. Fostering constructive competition through a carefully managed deregulation of services and products

4.4. Assisting regulatory agencies to establish structures that promote financial innovation

4.5. Assisting in mediation of disputes

4.6. Developing structures for stronger international regulation and collaboration

5. Objective 5: To achieve a diversified domestic financial sector within a competitive environment

Strategic Initiatives:

5.1 Broadening and deepening the range of financial instruments and services

5.2 Developing more effective rural and micro financial services

5.3 Promoting a derivatives industry to manage financial risk

5.4 Enhancing the payment system

6. Objective 6: To promote education, public awareness, capacity-building and financial literacy

Strategic Initiatives:

6.1. Increasing the knowledge of public officials in respect of the financial sector

6.2. Creating awareness and increasing the knowledge of the general public

6.3. Increasing the technical capacity of players in the financial sector

ES 4.0 RECOMMENDATIONS

The recommendations of FINSSP II have been formulated in response to the trends and challenges facing the financial sector as well as the vision, objectives and strategic initiatives set out in Chapter 3.

The Securities Industry

• Recommendation 1: The SEC should set itself a medium- to long-term objective of becoming financially self-sufficient xvi

• Recommendation 2: SEC should complete and submit amendments to The Securities Industry Law to the Minister of Finance and Economic Planning for onward submission to Cabinet and Parliament

• Recommendation 3: The Securities Industry Law should be amended to define derivatives as financial securities and thus allow their trading in Ghana

• Recommendation 4: The Ministry of Finance and Economic Planning should facilitate the establishment of a commodities exchange and a warehouse receipt system

• Recommendation 5: SEC should be supported to build the capacity of market participants

Ghana Stock Exchange

• Recommendation 6: Government should make listing on the Ghana Stock Exchange mandatory for regulated companies in banking, insurance, telecommunications, mining and energy sectors

• Recommendation 7:

a. MOFEP should facilitate the establishment of an SME Market under the supervision of the Ghana Stock Exchange

b. The SEC/GSE should agree on maximum fees that companies that wish to list would pay for IPO fees

• Recommendation 8: Security Market Regulators in Ghana, Nigeria and Cote d’Ivoire should agree on harmonized rules and regulatory framework and a detailed action plan for market integration. Ghana should initiate government-to-government discussions and involvement.

• Recommendation 9: Government should remove the distortions in the taxation of investment income by applying the same tax rates to dividends and interest income

The Bond Market

• Recommendation 10: The Ministry of Finance and Economic Planning and the Bank of Ghana should build up of PDs’ technical capacity in respect of the understanding and pricing fixed income securities

• Recommendation 11: The enabling statutes for statutory bodies should be amended to clarify their corporate status as potential borrowers in the debt market.

• Recommendation 12: Government should establish a framework within which MMDAs can access the capital market

• Recommendation 13: The Ghana Stock Exchange should operate a common trading screen for the trading of all government securities listed on the Exchange. The GSE should establish a seamless interface between the GSE Automated Trading System and the Central Securities Depository of the Bank of Ghana

• Recommendation 14: More consistency and transparency is required in the conduct of the public debt issuance program and central bank’s open market operations. Specifically,

a. Auction volumes should be kept as stable as possible and any unusual amounts, and the rationale for them, should be known to the market well in advance;

b. Government should consistently issue benchmark government bonds.

c. An annual auction calendar should be published at the beginning of each year.

• Recommendation 15: The SEC and GSE, backed by the Government, should embark on an extensive programme of educating officers of listed companies xvii and non-listed companies about the concept of bond financing of corporate activities.

• Recommendation 16: Bank of Ghana should establish a proprietary trading desk independent of the OMO desk which should quote firm bid and ask prices just like all other dealers in the market to kick-off secondary trading of government securities.

The Money Market

• Recommendation 17: The SEC should recommend to the Minister of Finance and Economic Planning the expansion of the definition of securities under the Securities Industry Law to include Commercial Paper and similar money market instruments.

Investment Dealers

• Recommendation 18: SEC and GSE should require Investment Dealers/LDMs to have an enhanced capacity to undertake more market activities such as firm commitment underwriting. They must also install adequate level of state-of-the-art-technology

The Pension Industry

• Recommendation 19: To ensure that the pensions industry develops and contributes substantially to mobilization and supply of long-term funds, government strategy must be to get the NPRA off the ground and running in the shortest possible time. In this respect, there should be sufficient budgetary allocation for setting up the new NPRA secretariat including adequate office accommodation, computer hardware and software and staffing the NPRA appropriately.

• Recommendation 20: Resource NPRA sufficiently to educate the general public, trustees, fund managers and custodians on the provisions of the new pension regime.

• Recommendation 21: Continue with the ongoing restructuring of SSNIT in the following ways:

a. getting rid of non-performing assets on SSNIT’s balance sheet to improve the return to total assets

b. reducing the operational cost of running the SSNIT.

c. Installing a modern IT system for managing pensions under its purview.

d. improving the returns on its investment portfolio

The Insurance Industry

• Recommendation 22:

a. The industry, spearheaded by the NIC, should undertake to enhance insurance activity, principally by researching customer needs and developing products to meet such needs

b. Develop and promote customer protection programmes to win the confidence of the customer

• Recommendation 23:

a. NIC should expedite action on migration to risk-based capital in line with best practice and should be encouraged.

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b. Amend the minimum capital requirement to the Ghana cedi equivalent of US$5 million.

c. Ensure regular actuarial assessment of individual life company risks and exposure and adjust required capital upwards of the US$ 5 million if need be

• Recommendation 24: NIC should focus attention on raising the solvency level of the industry

• Recommendation 25: Government should work with the NIC and the Insurers Association towards chartering the Actuarial Society of Ghana and assisting them to obtain accreditation from the International Association of Actuaries.

• Recommendation 26: NIC should continue with efforts to support underwriting of agricultural insurance

• Recommendation 27: NIC should finalize required revisions to the Insurance Act identified by the industry and present these for passage into law.

Recommendation 28: The Ghana Insurers Association’s pool of insurers to whom oil and gas insurance requests are directed should be formalized with NIC backing. The pool should have a formal secretariat staffed by experienced and knowledgeable persons and funded by members.

• Recommendation 29: NIC should intensify efforts to develop collaborative relationships with regional insurance supervisors

• Recommendation 30: Government should encourage the ECOWAS Secretariat to forward the Harmonized Compensation Convention for Victims of Motor Accidents within the West African sub-Region to Ghana’s Parliament as a matter of urgency to ensure equity in compensation for Ghanaians injured in road accidents

• Recommendation 31: NIC should facilitate the development and adoption of a market conduct agreement by the Ghana Insurers Association and insurance brokers.

• Recommendation 32: Government should support NIC and the Ghana Insurers Association to educate the public on claims requirements

The Banking Industry

• Recommendation 33: The Bank of Ghana should address problems in the law on non disclosure of client information which is inhibiting the information collection efforts of credit bureaux

• Recommendation 34:

a. Government should continue to support efforts aimed at building a good credit information infrastructure

b. Bank of Ghana should promote better enforcement of creditor and debtor rights.

• Recommendation 35: Government should provide continuous financial education for the members of the judiciary and the bar

• Recommendation 36:

a. Bank of Ghana should have an appropriate institutional set up that will investigate oligopolistic or monopoly behaviours and unfair trade practices among the banks to ensure that interest rates and fees are set competitively.

b. The BoG should be equipped with capacity necessary to undertake the tasks through technical assistance.

c. BoG should annually report on whether any oligopolistic or monopoly behaviours and unfair trade practices were found among the banks.

d. The Ministry of Finance and Economic Planning, Bank of Ghana and The Attorney-General’s Department should spearhead drafting of anti-monopoly xix and unfair trade practices legislation in banking with penalties to deter such practices.

e. The BoG should undertake research and establish a transparent method for calculating bank base rates and also monitor how banks compute their base rates.

• Recommendation 37: The Bank of Ghana should periodically publish real deposit and real lending rates. The public should be advised about the meaning of negative real deposit rates

• Recommendation 38: The Bank of Ghana should prohibit ad valorem fees.

Instead, maximum fees per transaction should be indicated based on best practices and market conditions.

• Recommendation 39: Banks and other financial institutions should be assisted with institutional capacity-building

• Recommendation 40: The capacity of Bank of Ghana’s Banking Supervisory Department should be enhanced.

• Recommendation 41: Government should give its full support to implementation of risk-based banking supervision

• Recommendation 42: Undertake a feasibility study to establish the viability of deposit insurance

Payment and Settlement Systems

• Recommendation 43: Government should adopt the policy of paying salaries by way of e-Zwich. GhIPSS should continue to educate the general public and government officials about the advantages of e-Zwich.

• Recommendation 44: Government should move to process most of its payments to e-Zwich accounts and receive payments by e-Zwich

• Recommendation 45:

a. Government and the BoG should assist GhIPSS to Intensify efforts to enlist the co-operation of the informal sector groups in using the e-Zwich card

b. Government should support GhIPPS with financial assistance to educate the public and to effect a change in people’s attitude to embrace the e-Zwich.

• Recommendation 46: Amend the Bills of Exchange Act, 1961 (Act 55) to reflect modern trends in payment systems

Anti-Money Laundering and Counter Terrorist Financing

• Recommendation 47: Government should ensure that the National Strategy for the Countering of Money Laundering and Financing of Terrorism alongside the Action Plan are finalized and operationalized.

• Recommendation 48: There should be sufficient budgetary allocation for completing the setting up of the Financial Intelligence Center (FIC) including adequate office accommodation, public education, logistical support and appropriate staffing.

Rural and Community Banks (RCBs)

• Recommendation 49:

a. Government should support the internal audit unit of the ARB Apex Bank with capacity building while RCBs contribute to meeting the operational cost of the internal audit work.

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b. ARB Apex Bank should take up the training of internal audit staff employed by RCBs to ensure they can perform well

• Recommendation 50: Review the original concept of RCBs as unit banks to allow them to merge into more viable units. The BoG should provide technical advice in this regard

• Recommendation 51: Review and enhance the corporate governance structures ( rules regarding shareholding, voting, board structure, appointment of directors, skill set of board members, tenure of directors, etc) of RCBs.

Savings and Loans Companies

• Recommendation 52: BoG should be prepared to engage Savings & Loans companies that are able to grow their capital to levels between the capital requirements of savings and loans companies (GHS7 million) and banks (GHS 60 million) with request for additional services to their clients (such as direct cheque clearing and international money transfer).

Credit Unions

• Recommendation 53: Promulgate a specific credit union law to address regulatory issues of concern to credit unions.

Micro-Finance

• Recommendation 54: The Banking Supervision of BoG should set up a microfinance unit.

• Recommendation 55:

a. Regulations for public disclosure and transparency in the operations of microfinance institutions should be enhanced to help protect consumers and build confidence in their operations.

b. GHAMFIN should promote the traditional principles of microfinance as well as international best practices for consumer protection.

• Recommendation 56: Government should support GHAMFIN to develop and implement industry standards.

• Recommendation 57: GHAMFIN should be supported to enhance its capacity to

a. promote and build capacities of microfinance institutions in social performance management

b. monitor and publish performance bench marking of microfinance institutions sector

c. develop and manage database of all microfinance institutions

d. set up and manage a central resource centre for microfinance literature, publications and other documentations

Susu

• Recommendation 58: A specific legislative instrument to regulate microfinance institutions including Susu companies should be put in place.

• Recommendation 59: Bank of Ghana should enforce the prohibition of lending by Susu Collectors.

• Recommendation 60: BoG should work with the Susu collectors association to ensure that Susu collectors undergo training in record keeping before being allowed to practice their trade

• Recommendation 61: Susu companies should be treated as savings and loans companies for regulatory purposes.

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• Recommendation 62: GCSCA should be supported to build its structures and its capacity as well as the capacities of its members

Money Lenders

• Recommendation 63: : BoG, in consultation with the Association of Money Lenders should establish a regulatory framework for supervision and monitoring of money lenders

Development Financing

Agriculture

• Recommendation 64: As far as possible the Agricultural Development and Investment Fund announced by Government should be channelled through existing financial institutions. Government draw up operational guidelines for banks to access such funds and enter into a balanced risk-sharing agreement that provides appropriate incentives to banks to tap the fund.

• Recommendation 65: MOFEP FSD should work with the Ministry of Food and Agriculture to promote the development and implementation of policies that support a continuous flow of credit to the agricultural sector.

Housing Finance

• Recommendation 66: Government should facilitate the supply of home loans (mortgages) by establishing a mortgage guarantee scheme for low to middle income buyers buying multiple unit and single unit residential accommodation

• Recommendation 67: Reduce the transaction costs by eliminating stamp duties on the registration of titles for residential homes in the affordable price range

• Recommendation 68: Issue housing bonds (minimum 10-year maturity) to provide a financing facility that could be tapped by financial institutions for long-term funds for mortgage lending.

The Venture Capital Trust Fund

• Recommendation 69: : The Government should undertake a strategic review of the Venture Capital Trust Fund with a view to confirming its mandate and establishing a permanent source of funding

Eximguaranty Co. Ltd.

• Recommendation 70

a. Government should devise sustainable means of funding the Eximguaranty

Company

b. There should be a mechanism in place to get banks to pass on risks mitigated by Eximguaranty Company to their customers through lower interest rates.

Corporate Governance

• Recommendation 71: Ghana should develop a holistic Corporate Governance Code for licensed financial institutions, public companies of a certain size and listed companies.

• Recommendation 72: : Regulatory agencies in cooperation with industry associations and the Institute of Directors should develop and run mandatory certified programmes for members of board directors of financial institutions..

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• Recommendation 73: Educate shareholders and other stakeholders about…