In the second and concluding part of our 2010 Banking Survey, TOMA IMIRHE looks at how the banks are responding to domestic and global short term difficulties, and beyond this to how increasing competition, changing regulation, bigger capital and improved technology are shaping the future of Ghana’s universal banking industry.
The winds of change are twirling across Ghana’s commercial banking industry and when they subside, it will be quite different from what it was before the transformation that has gathered steam over the past decade, actually began. Part of the on-going change is being brought about by the globalization of products, best practices and improved corporate governance standards. Part is being propelled by the ICT revolution, which has transformed not just how banking products and services all around the world can be delivered to customers, but also the efficiency of bank office operations.
But the sharpest influence remains that of local circumstances and the regulatory architecture. Increased capital requirements are making for bigger, stronger banks, increased competition is making them more attuned to the needs of customers, and the advent of universal banking has given them licence to meet those needs in more ways than ever before. If Ghana’s banks can take advantage of all this, they will be much the better for it, and more importantly, their customers even more so.
Inevitably, there are downside risks though. The expansion of branch networks will stretch the banks capacity with regards to financial controls, and the growing range of products and services they can offer, coupled with bigger capacity to lend, will test their risk management capacity.
Taking care of the short term first
While the banking industry is already well under the throes of transformation though, the forces of change are necessarily being kept in check for new as the banks cope with the after-shocks of the receding turmoil both in the global economy and the domestic one as well. To be sure, Ghana’s banking industry has been relatively insulated from the ill-effects of the global credit crunch. The industry does not maintain a large proportion of its assets abroad and the local subsidiaries of foreign banks are run as separate entities with regards to their financial assets and liabilities. However, the credit crunch inevitably has tightened the conditions for credit flows into Ghana’s banking industry from the global banking industry, especially with regards to lines of credit which are important because they are longer tenured than local deposits and the terms of international trade finance transactions.
Besides, the credit crunch itself has served as a warning to Ghana’s banks about the dangers of imprudent lending, one buttressed by the on-going credit travails of some banks in neighbouring Nigeria, which deposit being recently heavily re-capitalized by their private shareholders have been imprudent and consequently have required a government sponsored bail-out.
Those lessons have been taught at a time when Ghana’s domestic economy has suffered a downturn of its own, brought about by the spike in the fiscal and current account deficits during the last years in office of the previous government and the stiff measures employed to bring them down during the first years of the current one. Rising inflation and accompanying higher interest rates increased the cost of credit, even as the current tight monetary stance employed to steam them has afflicted business and household cash-flows, reducing their capacities to service their loans.
This has reflected in a significant deterioration in the quality of the banking industry’s aggregate loan portfolio since 2009. The industry’s non-performing loans ratio stood at 14.9% by the end of 2009, nearly double the 7.7% ratio a year earlier. Similarly, loan-loss provision to gross loans ratio increased by 9.4% during the year, from 5.1% at its start.
Ghana’s banks have never been a particularly enthusiastic lot with regards to lending even at the best of times and with the sharp increase in loan servicing defaults, especially at a time of relatively high yields on riskless short-dated government securities (which between 2008 and 2009 the money market was awash with), banks did the sensible thin and retreated away from the former, towards the latter. As the share of net loans and advances in the banking industry’s total assets declined to 43.8% by the end of 2009 down from 52.3% a year earlier, there was a converse increase in the industry’s investment in bills and securities as a share of total assets, to 21.3%, up from 14.5%, over the same period.
Now though, with both inflation and interest rates in decline and just as importantly, sharp falls in both the yields on, and availability of short term government securities, banks will regain their confidence to lend, pressured by their desire to retain their interest margins (which notoriously are reputed to be the widest in Africa), and increasing capacity to lend as a result of bigger shareholders funds and rising deposits.
Thus, the short term constraints to the expansion of Ghana’s universal banking industry is far from just being one that heralds bigger business volumes; the underlying structure of how those business volumes are being generated, is changing too, in two fundamental ways.
Bank branches everywhere
First is that armed with more capital, the banks are seeking to expand their physical presence significantly. The past few years has seen easily the biggest explosion of new bank branches that Ghana has ever experienced. Ghana Commercial Bank, the nation’s largest still has by far the biggest, of over 150 branches, but it is instructive that about a third of these were opened over the past decade. Barclays Bank is Ghana’s second largest and has the second widest branch network too, of 94 branches. Instructively, about half of them are relatively recent, although the bank has been here for around a century.
The smaller banks are not waiting nearly so long. For instance International Commercial Bank opened three branches last year alone, bringing the number to 14, (and two agencies) and this year has already yet another, with five more planned before the end of the year.
Amalgamated Bank has expanded its branch network from three to 19 over the past four years, including five new branches opened last year alone. The newest banks, born into a scramble to expand branch presence that had already started in earnest are even more enthusiastic. The most vivid example is BSIC, which opened shop in 2008 and last year expanded its branch network from one to ten.
With recapitalization fuelling the drive into the hinterlands, it is going to get even more intense. For instance Agricultural Development Bank, the country’s fifth largest, is looking to open not less than 17 branches within the next three years, mostly in rural areas.
Importantly, several banks are devising less conventional ways to quickly expand their branch networks. UT Bank’s just concluded merger with UT Financial Services gives it immediate access to the latter’s national branch network for instance. Another type of innovation is Zenith Bank’s banking counters set up within the head office premises of Databank, which is an investment (not a universal) bank.
Fidelity Bank is not aiming of opening 10 branches on its own every year over the next three years, but is even more ambitiously finalizing the approach process for it to engage in an innovative collaboration with Ghana Post to use its nationwide office network to establish a physical presence in over 100 locations all around the country within the next three years. Even Standard Chartered Bank, the most reticent about opening physical branches because of its up-market strategic market positioning, uses the branches of both GCB and ADB in the hinterlands to conduct financial transactions for its clients who have nationwide operations.
While sheer competition has helped to persuade banks to expand their branch networks, the replacement of the erstwhile dichotomy between commercial and merchant banking with universal banking has played a major role too. Some of the fastest branch network expansions have been done by erstwhile merchant banks such as CAL Bank, Ecobank and Merchant Bank which, armed with their recently acquired universal banking licences, have raced to build up retail banking networks.
Now it is instructive that most recapitalizing banks intend to use substantial proportions of their new equity capital to expand their branch networks. The rapid expansion of the branch networks of universal banks is aimed at winning new customers at the lower end of the market, outside those who reside in the big, relatively affluent and enlightened urban locations. This has dire implications for the rural and community banks who are now finding their most lucrative turf being invaded by the better armed universal banks. However, considering that as at the middle of the last decade, 80% of Ghanaians were still unbanked, there is huge potential for new customers and thus, much bigger business volumes.
Another major proportion of the new equity capital that the universal banks are arming themselves with though, will go into making sure that the bigger customer base they are seeking, will be enticed by a much wider choice of useful financial products and services.
Something for everybody
The introduction of universal banking has dramatically widened the scope of activity, that Ghana’s banks can get involved in. the universal banking charter allows its licences to engage in all sorts of financial intermediation although in many circumstances requires banks to certain activities through subsidiaries which have to be capitalized separately. Nevertheless it provides banks the opportunity to be virtually one-stop financial super-markets of sort and with their expanding branch networks and increasingly capable IT platforms for electronic delivery of products and services, a wider range of activities can be offered to the bigger customer bases they are seeking to secure.
Actually, though Ghana’s universal banks have been cautious about trying to exploit thus opportunity and for good reasons; expansion of a bank’s core operations brings with it risks that are different in nature and therefore need to be assessed and managed differently. It is instructive that in Nigeria, which adopted universal banking several years before Ghana did, that country’s central bank is considering re-adjusting the architecture, reigning in the bank’s diversification by restricting them to be only holding companies of various subsidiaries each chartered to do specific types of financial services.
Here in Ghana though, the conservative approach to diversification has prevented the need for restraints so far. Basically, Ghana’s financial service diversification by its banks have seen some of them go into investment banking micro-financing and insurance.
Investment banking has always been an obvious option, for erstwhile commercial banks, just as the erstwhile merchant banks, all of whom have been active participants in thus activity, have eagerly expanded into commercial banking. However, commercial banks have been slow to do even this. Prudential Bank is the only erstwhile commercial bank which has set up a dedicated investment banking output although HFC Bank had one – HFC Investment Services even before it got its universal banking license, Prudential Securities and Unibank has now secured a licence to establish its own such subsidiary.
Micro-financing is getting significant attention. For instance HFC Bank has invested in a dedicated micro-financing subsidiary, called Boafo Finance. The merged UT Bank can now deploy erstwhile UT Financial Services expertise and experience in micro-finance too, and has inherited its huge customer base. Prudential Bank has set up a susu scheme for micro entrepreneurs. However, while most banks are enthusiastically moving decidedly down-market to win new customers and bigger market share, among the consumer banking public and small and medium-sized companies, most are still circumspect about dedicated micro-financing and for good reason; lending to micro-enterprises is a tricky creation which requires deep local knowledge.
Barclays Bank for instance went deep into it and ended up with a relatively large proportion of under-performing loans. Lessons having been learnt, the larger, foreign banks prefer to finance dedicated micro-financing institutions who take up the credit risk themselves. But the smaller, indigenous banks such as Unibank and UT Bank are well suited to make good from micro-financing, as are the foreign ones. From developing economics, which have the requisite experience in this kind of activity such as International Commercial Bank.
Perhaps the most popular are of financial services diversification among the universal banks so far though is into the area of insurance, by providing bancassurance and micro-insurance products. So far no Ghanaian bank has gone as far as to set up an insurance firm of its own, although Intercontinental Bank Ghana’s Nigeria parent bank, Intercontinental Bank Plc, has directly set up a Ghanaian version of its own insurance subsidiary, Intercontinental WAPIc Insurance. Again caution reigns; even Nigerian own banks operating here in Ghana whose parent banks have insurance subsidiaries back in Nigeria such as UBA have not yet tried to do the same here, explaining that they want to make sure their core banking businesses are thriving first.
Instead of going headlong, Ghana’s banks are treading slowly, launching their bancassurance or micro-insurance products in collaboration with established dedicated insurance firms. For instance both Standard Chartered and Barclays Bank are in partnership with Enterprise Life Assurance Company, and Unibank is partnering Star Assurance National Investment Bank also offers bancassurance through a similar partnership and other banks such as Merchant Bank are gearing up to follow suit. Indeed, those subsidiaries revert to their parent banks capabilities when the opportunity for such business rears up here in Ghana. Thus, it is still the erstwhile merchant banks in Ghana most of whom have had vibrant dedicated asset management activities before the advent of universal banking that represent the banking industry in this area.
While Ghana’s universal banks have been cautious about product and service diversification, that have been very aggressive about the diversification of their delivery channels, beyond the conventional physical channels, into IT based ones and this will be a veritable battleground for the banks over the coming years.
How technology is changing Ghana’s banking industry
For much of Ghana’s banking public, the most profound changes in the way their banks serve them have been derived from the ICT technological revolution. Consider thus: barely 15 years ago, The Trust Bank, in its earlier incarnation as Meridian Bank pioneered the use of Automated Teller Machines in Ghana, but today not only does virtually every bank have them deployed outside at least most of their branches, but the new E-zwich national smart card payments platform is even presenting customers with the proposition of using any bank’s ATMs to withdraw money, not just their own.
Or consider this: when Ecobank Ghana first introduced its electronic banking product, then known as Econet, into the Ghanaian market a little over a decade ago it was an exciting novelty that only the big multinational banks such as Barclays Bank and Standard Chartered could quickly match. Now however, most banks offer electronic banking in various forms and the cutting edge has now moved forward to Standard Chartered’s Straight 2 Bank which allows customers not only to view their accounts remotely, and move monies within one bank, but to actually make payments too to accounts in other banks, and even to groups of beneficiaries whose accounts are spread across lots of their banks.
Another example; when Barclays Bank and SG-SSB Bank first introduced telephone banking into Ghana early in the decade it was a new phenomenon, available to only a small, up-market segment of the banking public; its proliferation is perhaps best illustrated by the fact that since 2004, UBA has offered this service not only in English but in the major Ghanaian indigenous languages as well.
SMS Banking, first introduced in 2003 by Standard Chartered has followed a similar route and is now a staple of most bank’s product offerings, and even Internet banking is now offered by more banks than not.
All this has made banking more convenient for enlightened customers and thus more attractive. Thus the banks are investing heavily in expanding their electronic banking suites with a view to getting more customers. Even as competition has persuaded banks to elongate the hours that their physical branches operate, (two banks, UT Bank and Unibank actually operate evening bank services at certain branches which stay open to 7 p.m.), some electronic banking products enable some services to be offered 24/7. Indeed, for the banks competing for the middle and upper market segments, they regard thus as the way forward and so are devoting huge resources to the replacement of physical product and service delivery channels with electronic ones.
The remaining deployment of ICT is driving down both the operational costs of the banks and the cost of accessing banking products and services. The use of technology reduces overall manpower needs in the banks, thus curbing the growth in their wage bills. To some extent it also reduces the amount of physical infrastructure required to provide banking products and services as well.
But more importantly for Ghana’s banking public, the increasing ICT backed capabilities of the country’s banking industry is effectively reducing the cost of the products and services they use. At the most basic level, for example, it is cheaper to obtain information concerning one’s account, or actually make financial transfers, from one’s home or office by computer or mobile phone than if one had to go to a bank branch, even if it was the closest branch geographical rather than the one in which the account was maintained. ICT platforms, allow for mass distribution, and so cut out the cost of individualized delivery of products and services.
Competition benefits the customer
But it is the intensifying competition in the banking industry that is enabling the banking public to enjoy the benefits of these cost savings rather than just bank shareholders who otherwise would have been content to see falling costs simply add to their profit margins.
Over the past decade or so, the number of deposit money banks operating in Ghana has doubled. This is the result of two things. One the supply scale, investors sees banking in Ghana as a potentially lucrative business, and their assessment is indeed correct. Even Access Bank, the latest to join the industry made a profit, in its first year which effectively was less than three quarters of actual banking operations. Bank of Baroda, which commenced operations a year earlier, made a healthy GH¢1.18 million in pre-tax profits during its very first full year of operations, in 2009. Only five of Ghana’s 26 universal banks made losses last year, and all of them are confident that they will be turned around this year. Instructively, 14 banks delivered returns on equity of over 10% last year, even as on-going recapitalization dampened their ROEs, below their usual levels.
Little wonder then that existing shareholders are loath to reduce their equity stakes in the banks (indeed all but the most cash-strapped investors took up their offers made than under a plethora of renounceable rights issues begun last year), potential new investors are bustling to buy into the banks wherever the opportunity arises, and several foreign banks are lobbying for licences from the Bank of Ghana to set up shop here.
On the demand side Ghana’s central bank has licenced lots of new banks over the past decade for two reasons. One is that it has adopted a deliberate policy of attracting various banking cultures into Ghana. Thus, there are several multinational banks headquartered in Europe such as Barclays, Standard Chartered and SG-SSB; a number of Nigerian banks such as UBA, Zenith Bank, Intercontinental, Guaranty Trust and Access Bank; a West African regional bank – Ecobank Ghana; a South African bank – Stanbic; a Malaysian bank – ICB; an Indian Bank of Baroda; and a Libyan – Ghanaian joint venture – BSIC. Indigenous banking is well represented by majority state-owned banks such as GCB, ADB and Merchant Bank, as well as wholly privately owned ones such as Prudential, HFC, Fidelity, Unibank, UT Bank and First Atlantic.
Expect a couple more foreign banks to come on stream; the Bank of Ghana is willing to licence a good bank from North America for instance, which would bring that region’s banking culture to the Ghanaian economy.
The other reason why the Bank of Ghana has licenced so many new banks in recent years is that it wants to replace the notoriously oligopolistic pricing in Ghana’s universal banking industry with a more competitive approach, with a view to making the banks more price competitive. To be sure this is crucial; Ghana’s banks have made supra-normal profits from oligopoly at the expense of the banking public and in the process have put access to banking products and services beyond the affordability of many.
Increased competition by the growing number of banks has had a positive impact with regards to pricing but only a limited one so far. However there are signs that the erstwhile oligopoly is finally giving way. The Nigerian banks in particular have been aggressive in competitive pricing and the Ghanaian owned banks have responded in similar fashion, all thus forcing big multinational banks from the western hemisphere to follow suit. More competitive pricing is being achieved through initiatives and innovations from individual banks which their counterparts try to match. For instance, in 2004, UBA introduced its cashless account which allows customers to open savings and current accounts without an initial deposit. Today, several banks, offer the same terms.
In the same vein, International Commercial Bank does not charge commission on turnover, and although other banks have been reluctant to also forgo COT, there is an intense price competition in this regard, with most banks willing to undercut their competitor’s charges. More lately, banks such as UT Bank have begun offering interest on current account balances and even credit balances held on customers’ e-zwich cards.
Electronic banking charges, initially so stiff that such products were the exclusive preserve of the upper-end market segment customers of the big multinational banks, have fallen so low that they can now be afforded by all and sundry.
Now that such price competition has been unleashed, the cat cannot be put back in the bag, and tariffs will continue to fall as banks become more cost efficient with regards to their product and service delivery processes and systems.
However, increased competition has been less successful in bringing down the banks interest margins which remain, reputedly, the widest in Africa (See front page story and the interest rate tables in this 2010 Banking Survey). Here, oligopoly stills hold sway, despite concerted persuasion and criticism by the Bank of Ghana, government, financial commentators and the banking public.
The banks defend their appetite for wide margins by insisting that they are the commensurate rewards for the relatively high risks they run in giving credit. This argument is supported by the worrying high loan default rate in Ghana and the provisions that banks therefore have to make which cut significantly away from their profitability.
To get around this, the Bank of Ghana has promoted several initiatives over the past couple of years, aimed at reducing banks credit risk. One is the credit reference bureau, which are to gather credit track records of borrowers and disseminate them to the banks, thus allowing them to better assess their potential borrowing customers ability and willingness to pay back their loans, based on previous performance; and also to enable banks know how indebted they are to other banks before providing new loans.
Another is the recently enacted Borrowers and Lenders Act which sets out the legal framework for the responsibilities and obligations of both sides. As part of this, the central bank has set up a Collateral Registry which documents the collateral security provided by borrowers to lending banks so that they are more easily executed and borrowers cannot sue the same collateral to secure loans from several banks.
These are still new initiatives and necessarily will require time to fully perfect and implement. For instance the two licenced credit reference bureau are only now gathering the requisite database on customer credit histories. Thus, the impact on bank’s credit assessment and management has not yet been felt. Expectedly however, over the coming years it will. And as credit risk falls, supposedly, so will the interest margins the banks demand.
In actual fact though, this will be less simplistic. As banks arm themselves with more equity capital they will be hard pressed to increase their income and profits to at least maintain the returns they deliver to their shareholders. This means either expanding their lending or maintaining the wide margins they already insist on. The problem with the former is that increased competition is already forcing the banks to move down-market to win more business and here, the intrinsic credit risks are higher than with the relatively up-market borrowers they have been used to. This could negate the credit assessment and management gains derived from the new initiatives that the Bank of Ghana is promoting on their behalf.
Indeed this is why, even the strengthen financial muscle the banks are now acquiring will not result in a lending explosion, even in the (unlikely) event that the state will maintain its current fiscal discipline in the future and thus never return to the inordinately high level of domestic borrowing that occurred in the 1990s and the past few years.
Indeed, bank lending is shifting somewhat from enterprises towards consumers, as demand for credit from households increased and banks find it easier to provide salary backed loans then anticipated business cash-flow-backed loans. Also, the banking industry’s heavy investment in processes and product and service delivery systems points towards a growing emphasis on fee and commission income from banking transactions, rather than interest income from earning assts. This is prudent in that there is little or no credit risk underlying such income and the increasing sophistication of the banks delivery channels as well as of their customers needs will continue to create demand for non-funded banking products and services.
Ultimately, formal corporate Ghana will have to increasingly look to securitized debt for its funding. Already, companies rely considerably on short-term instruments such as commercial paper for their working capital and the next stage is for banks to begin matching those companies needs directly with the investible funds other bank customers have, taking a fee for this matchmaking rather than an interest margin for being directly in the middle, but which involves significant credit risk.
Gradually the banks, either directly for through investment banking subsidiaries will want to develop the larger term securitized debt market involving corporate bonds. There is already significant activity in the private placement bend market for relatively larger companies.
This lies further ahead though on the horizon. For now the banks are simply looking to reduce the incidence of loan defaults, even as they seek more customers, across more locations in Ghana and develop increasingly sophisticated ICB backed products and services that will make them more attractive to those customers.
The winds of change are twirling across Ghana’s commercial banking industry and when they subside, it will be quite different from what it was before the transformation that has gathered steam over the past decade, actually began. Part of the on-going change is being brought about by the globalization of products, best practices and improved corporate governance standards. Part is being propelled by the ICT revolution, which has transformed not just how banking products and services all around the world can be delivered to customers, but also the efficiency of bank office operations.
But the sharpest influence remains that of local circumstances and the regulatory architecture. Increased capital requirements are making for bigger, stronger banks, increased competition is making them more attuned to the needs of customers, and the advent of universal banking has given them licence to meet those needs in more ways than ever before. If Ghana’s banks can take advantage of all this, they will be much the better for it, and more importantly, their customers even more so.
Inevitably, there are downside risks though. The expansion of branch networks will stretch the banks capacity with regards to financial controls, and the growing range of products and services they can offer, coupled with bigger capacity to lend, will test their risk management capacity.
Taking care of the short term first
While the banking industry is already well under the throes of transformation though, the forces of change are necessarily being kept in check for new as the banks cope with the after-shocks of the receding turmoil both in the global economy and the domestic one as well. To be sure, Ghana’s banking industry has been relatively insulated from the ill-effects of the global credit crunch. The industry does not maintain a large proportion of its assets abroad and the local subsidiaries of foreign banks are run as separate entities with regards to their financial assets and liabilities. However, the credit crunch inevitably has tightened the conditions for credit flows into Ghana’s banking industry from the global banking industry, especially with regards to lines of credit which are important because they are longer tenured than local deposits and the terms of international trade finance transactions.
Besides, the credit crunch itself has served as a warning to Ghana’s banks about the dangers of imprudent lending, one buttressed by the on-going credit travails of some banks in neighbouring Nigeria, which deposit being recently heavily re-capitalized by their private shareholders have been imprudent and consequently have required a government sponsored bail-out.
Those lessons have been taught at a time when Ghana’s domestic economy has suffered a downturn of its own, brought about by the spike in the fiscal and current account deficits during the last years in office of the previous government and the stiff measures employed to bring them down during the first years of the current one. Rising inflation and accompanying higher interest rates increased the cost of credit, even as the current tight monetary stance employed to steam them has afflicted business and household cash-flows, reducing their capacities to service their loans.
This has reflected in a significant deterioration in the quality of the banking industry’s aggregate loan portfolio since 2009. The industry’s non-performing loans ratio stood at 14.9% by the end of 2009, nearly double the 7.7% ratio a year earlier. Similarly, loan-loss provision to gross loans ratio increased by 9.4% during the year, from 5.1% at its start.
Ghana’s banks have never been a particularly enthusiastic lot with regards to lending even at the best of times and with the sharp increase in loan servicing defaults, especially at a time of relatively high yields on riskless short-dated government securities (which between 2008 and 2009 the money market was awash with), banks did the sensible thin and retreated away from the former, towards the latter. As the share of net loans and advances in the banking industry’s total assets declined to 43.8% by the end of 2009 down from 52.3% a year earlier, there was a converse increase in the industry’s investment in bills and securities as a share of total assets, to 21.3%, up from 14.5%, over the same period.
Now though, with both inflation and interest rates in decline and just as importantly, sharp falls in both the yields on, and availability of short term government securities, banks will regain their confidence to lend, pressured by their desire to retain their interest margins (which notoriously are reputed to be the widest in Africa), and increasing capacity to lend as a result of bigger shareholders funds and rising deposits.
Thus, the short term constraints to the expansion of Ghana’s universal banking industry is far from just being one that heralds bigger business volumes; the underlying structure of how those business volumes are being generated, is changing too, in two fundamental ways.
Bank branches everywhere
First is that armed with more capital, the banks are seeking to expand their physical presence significantly. The past few years has seen easily the biggest explosion of new bank branches that Ghana has ever experienced. Ghana Commercial Bank, the nation’s largest still has by far the biggest, of over 150 branches, but it is instructive that about a third of these were opened over the past decade. Barclays Bank is Ghana’s second largest and has the second widest branch network too, of 94 branches. Instructively, about half of them are relatively recent, although the bank has been here for around a century.
The smaller banks are not waiting nearly so long. For instance International Commercial Bank opened three branches last year alone, bringing the number to 14, (and two agencies) and this year has already yet another, with five more planned before the end of the year.
Amalgamated Bank has expanded its branch network from three to 19 over the past four years, including five new branches opened last year alone. The newest banks, born into a scramble to expand branch presence that had already started in earnest are even more enthusiastic. The most vivid example is BSIC, which opened shop in 2008 and last year expanded its branch network from one to ten.
With recapitalization fuelling the drive into the hinterlands, it is going to get even more intense. For instance Agricultural Development Bank, the country’s fifth largest, is looking to open not less than 17 branches within the next three years, mostly in rural areas.
Importantly, several banks are devising less conventional ways to quickly expand their branch networks. UT Bank’s just concluded merger with UT Financial Services gives it immediate access to the latter’s national branch network for instance. Another type of innovation is Zenith Bank’s banking counters set up within the head office premises of Databank, which is an investment (not a universal) bank.
Fidelity Bank is not aiming of opening 10 branches on its own every year over the next three years, but is even more ambitiously finalizing the approach process for it to engage in an innovative collaboration with Ghana Post to use its nationwide office network to establish a physical presence in over 100 locations all around the country within the next three years. Even Standard Chartered Bank, the most reticent about opening physical branches because of its up-market strategic market positioning, uses the branches of both GCB and ADB in the hinterlands to conduct financial transactions for its clients who have nationwide operations.
While sheer competition has helped to persuade banks to expand their branch networks, the replacement of the erstwhile dichotomy between commercial and merchant banking with universal banking has played a major role too. Some of the fastest branch network expansions have been done by erstwhile merchant banks such as CAL Bank, Ecobank and Merchant Bank which, armed with their recently acquired universal banking licences, have raced to build up retail banking networks.
Now it is instructive that most recapitalizing banks intend to use substantial proportions of their new equity capital to expand their branch networks. The rapid expansion of the branch networks of universal banks is aimed at winning new customers at the lower end of the market, outside those who reside in the big, relatively affluent and enlightened urban locations. This has dire implications for the rural and community banks who are now finding their most lucrative turf being invaded by the better armed universal banks. However, considering that as at the middle of the last decade, 80% of Ghanaians were still unbanked, there is huge potential for new customers and thus, much bigger business volumes.
Another major proportion of the new equity capital that the universal banks are arming themselves with though, will go into making sure that the bigger customer base they are seeking, will be enticed by a much wider choice of useful financial products and services.
Something for everybody
The introduction of universal banking has dramatically widened the scope of activity, that Ghana’s banks can get involved in. the universal banking charter allows its licences to engage in all sorts of financial intermediation although in many circumstances requires banks to certain activities through subsidiaries which have to be capitalized separately. Nevertheless it provides banks the opportunity to be virtually one-stop financial super-markets of sort and with their expanding branch networks and increasingly capable IT platforms for electronic delivery of products and services, a wider range of activities can be offered to the bigger customer bases they are seeking to secure.
Actually, though Ghana’s universal banks have been cautious about trying to exploit thus opportunity and for good reasons; expansion of a bank’s core operations brings with it risks that are different in nature and therefore need to be assessed and managed differently. It is instructive that in Nigeria, which adopted universal banking several years before Ghana did, that country’s central bank is considering re-adjusting the architecture, reigning in the bank’s diversification by restricting them to be only holding companies of various subsidiaries each chartered to do specific types of financial services.
Here in Ghana though, the conservative approach to diversification has prevented the need for restraints so far. Basically, Ghana’s financial service diversification by its banks have seen some of them go into investment banking micro-financing and insurance.
Investment banking has always been an obvious option, for erstwhile commercial banks, just as the erstwhile merchant banks, all of whom have been active participants in thus activity, have eagerly expanded into commercial banking. However, commercial banks have been slow to do even this. Prudential Bank is the only erstwhile commercial bank which has set up a dedicated investment banking output although HFC Bank had one – HFC Investment Services even before it got its universal banking license, Prudential Securities and Unibank has now secured a licence to establish its own such subsidiary.
Micro-financing is getting significant attention. For instance HFC Bank has invested in a dedicated micro-financing subsidiary, called Boafo Finance. The merged UT Bank can now deploy erstwhile UT Financial Services expertise and experience in micro-finance too, and has inherited its huge customer base. Prudential Bank has set up a susu scheme for micro entrepreneurs. However, while most banks are enthusiastically moving decidedly down-market to win new customers and bigger market share, among the consumer banking public and small and medium-sized companies, most are still circumspect about dedicated micro-financing and for good reason; lending to micro-enterprises is a tricky creation which requires deep local knowledge.
Barclays Bank for instance went deep into it and ended up with a relatively large proportion of under-performing loans. Lessons having been learnt, the larger, foreign banks prefer to finance dedicated micro-financing institutions who take up the credit risk themselves. But the smaller, indigenous banks such as Unibank and UT Bank are well suited to make good from micro-financing, as are the foreign ones. From developing economics, which have the requisite experience in this kind of activity such as International Commercial Bank.
Perhaps the most popular are of financial services diversification among the universal banks so far though is into the area of insurance, by providing bancassurance and micro-insurance products. So far no Ghanaian bank has gone as far as to set up an insurance firm of its own, although Intercontinental Bank Ghana’s Nigeria parent bank, Intercontinental Bank Plc, has directly set up a Ghanaian version of its own insurance subsidiary, Intercontinental WAPIc Insurance. Again caution reigns; even Nigerian own banks operating here in Ghana whose parent banks have insurance subsidiaries back in Nigeria such as UBA have not yet tried to do the same here, explaining that they want to make sure their core banking businesses are thriving first.
Instead of going headlong, Ghana’s banks are treading slowly, launching their bancassurance or micro-insurance products in collaboration with established dedicated insurance firms. For instance both Standard Chartered and Barclays Bank are in partnership with Enterprise Life Assurance Company, and Unibank is partnering Star Assurance National Investment Bank also offers bancassurance through a similar partnership and other banks such as Merchant Bank are gearing up to follow suit. Indeed, those subsidiaries revert to their parent banks capabilities when the opportunity for such business rears up here in Ghana. Thus, it is still the erstwhile merchant banks in Ghana most of whom have had vibrant dedicated asset management activities before the advent of universal banking that represent the banking industry in this area.
While Ghana’s universal banks have been cautious about product and service diversification, that have been very aggressive about the diversification of their delivery channels, beyond the conventional physical channels, into IT based ones and this will be a veritable battleground for the banks over the coming years.
How technology is changing Ghana’s banking industry
For much of Ghana’s banking public, the most profound changes in the way their banks serve them have been derived from the ICT technological revolution. Consider thus: barely 15 years ago, The Trust Bank, in its earlier incarnation as Meridian Bank pioneered the use of Automated Teller Machines in Ghana, but today not only does virtually every bank have them deployed outside at least most of their branches, but the new E-zwich national smart card payments platform is even presenting customers with the proposition of using any bank’s ATMs to withdraw money, not just their own.
Or consider this: when Ecobank Ghana first introduced its electronic banking product, then known as Econet, into the Ghanaian market a little over a decade ago it was an exciting novelty that only the big multinational banks such as Barclays Bank and Standard Chartered could quickly match. Now however, most banks offer electronic banking in various forms and the cutting edge has now moved forward to Standard Chartered’s Straight 2 Bank which allows customers not only to view their accounts remotely, and move monies within one bank, but to actually make payments too to accounts in other banks, and even to groups of beneficiaries whose accounts are spread across lots of their banks.
Another example; when Barclays Bank and SG-SSB Bank first introduced telephone banking into Ghana early in the decade it was a new phenomenon, available to only a small, up-market segment of the banking public; its proliferation is perhaps best illustrated by the fact that since 2004, UBA has offered this service not only in English but in the major Ghanaian indigenous languages as well.
SMS Banking, first introduced in 2003 by Standard Chartered has followed a similar route and is now a staple of most bank’s product offerings, and even Internet banking is now offered by more banks than not.
All this has made banking more convenient for enlightened customers and thus more attractive. Thus the banks are investing heavily in expanding their electronic banking suites with a view to getting more customers. Even as competition has persuaded banks to elongate the hours that their physical branches operate, (two banks, UT Bank and Unibank actually operate evening bank services at certain branches which stay open to 7 p.m.), some electronic banking products enable some services to be offered 24/7. Indeed, for the banks competing for the middle and upper market segments, they regard thus as the way forward and so are devoting huge resources to the replacement of physical product and service delivery channels with electronic ones.
The remaining deployment of ICT is driving down both the operational costs of the banks and the cost of accessing banking products and services. The use of technology reduces overall manpower needs in the banks, thus curbing the growth in their wage bills. To some extent it also reduces the amount of physical infrastructure required to provide banking products and services as well.
But more importantly for Ghana’s banking public, the increasing ICT backed capabilities of the country’s banking industry is effectively reducing the cost of the products and services they use. At the most basic level, for example, it is cheaper to obtain information concerning one’s account, or actually make financial transfers, from one’s home or office by computer or mobile phone than if one had to go to a bank branch, even if it was the closest branch geographical rather than the one in which the account was maintained. ICT platforms, allow for mass distribution, and so cut out the cost of individualized delivery of products and services.
Competition benefits the customer
But it is the intensifying competition in the banking industry that is enabling the banking public to enjoy the benefits of these cost savings rather than just bank shareholders who otherwise would have been content to see falling costs simply add to their profit margins.
Over the past decade or so, the number of deposit money banks operating in Ghana has doubled. This is the result of two things. One the supply scale, investors sees banking in Ghana as a potentially lucrative business, and their assessment is indeed correct. Even Access Bank, the latest to join the industry made a profit, in its first year which effectively was less than three quarters of actual banking operations. Bank of Baroda, which commenced operations a year earlier, made a healthy GH¢1.18 million in pre-tax profits during its very first full year of operations, in 2009. Only five of Ghana’s 26 universal banks made losses last year, and all of them are confident that they will be turned around this year. Instructively, 14 banks delivered returns on equity of over 10% last year, even as on-going recapitalization dampened their ROEs, below their usual levels.
Little wonder then that existing shareholders are loath to reduce their equity stakes in the banks (indeed all but the most cash-strapped investors took up their offers made than under a plethora of renounceable rights issues begun last year), potential new investors are bustling to buy into the banks wherever the opportunity arises, and several foreign banks are lobbying for licences from the Bank of Ghana to set up shop here.
On the demand side Ghana’s central bank has licenced lots of new banks over the past decade for two reasons. One is that it has adopted a deliberate policy of attracting various banking cultures into Ghana. Thus, there are several multinational banks headquartered in Europe such as Barclays, Standard Chartered and SG-SSB; a number of Nigerian banks such as UBA, Zenith Bank, Intercontinental, Guaranty Trust and Access Bank; a West African regional bank – Ecobank Ghana; a South African bank – Stanbic; a Malaysian bank – ICB; an Indian Bank of Baroda; and a Libyan – Ghanaian joint venture – BSIC. Indigenous banking is well represented by majority state-owned banks such as GCB, ADB and Merchant Bank, as well as wholly privately owned ones such as Prudential, HFC, Fidelity, Unibank, UT Bank and First Atlantic.
Expect a couple more foreign banks to come on stream; the Bank of Ghana is willing to licence a good bank from North America for instance, which would bring that region’s banking culture to the Ghanaian economy.
The other reason why the Bank of Ghana has licenced so many new banks in recent years is that it wants to replace the notoriously oligopolistic pricing in Ghana’s universal banking industry with a more competitive approach, with a view to making the banks more price competitive. To be sure this is crucial; Ghana’s banks have made supra-normal profits from oligopoly at the expense of the banking public and in the process have put access to banking products and services beyond the affordability of many.
Increased competition by the growing number of banks has had a positive impact with regards to pricing but only a limited one so far. However there are signs that the erstwhile oligopoly is finally giving way. The Nigerian banks in particular have been aggressive in competitive pricing and the Ghanaian owned banks have responded in similar fashion, all thus forcing big multinational banks from the western hemisphere to follow suit. More competitive pricing is being achieved through initiatives and innovations from individual banks which their counterparts try to match. For instance, in 2004, UBA introduced its cashless account which allows customers to open savings and current accounts without an initial deposit. Today, several banks, offer the same terms.
In the same vein, International Commercial Bank does not charge commission on turnover, and although other banks have been reluctant to also forgo COT, there is an intense price competition in this regard, with most banks willing to undercut their competitor’s charges. More lately, banks such as UT Bank have begun offering interest on current account balances and even credit balances held on customers’ e-zwich cards.
Electronic banking charges, initially so stiff that such products were the exclusive preserve of the upper-end market segment customers of the big multinational banks, have fallen so low that they can now be afforded by all and sundry.
Now that such price competition has been unleashed, the cat cannot be put back in the bag, and tariffs will continue to fall as banks become more cost efficient with regards to their product and service delivery processes and systems.
However, increased competition has been less successful in bringing down the banks interest margins which remain, reputedly, the widest in Africa (See front page story and the interest rate tables in this 2010 Banking Survey). Here, oligopoly stills hold sway, despite concerted persuasion and criticism by the Bank of Ghana, government, financial commentators and the banking public.
The banks defend their appetite for wide margins by insisting that they are the commensurate rewards for the relatively high risks they run in giving credit. This argument is supported by the worrying high loan default rate in Ghana and the provisions that banks therefore have to make which cut significantly away from their profitability.
To get around this, the Bank of Ghana has promoted several initiatives over the past couple of years, aimed at reducing banks credit risk. One is the credit reference bureau, which are to gather credit track records of borrowers and disseminate them to the banks, thus allowing them to better assess their potential borrowing customers ability and willingness to pay back their loans, based on previous performance; and also to enable banks know how indebted they are to other banks before providing new loans.
Another is the recently enacted Borrowers and Lenders Act which sets out the legal framework for the responsibilities and obligations of both sides. As part of this, the central bank has set up a Collateral Registry which documents the collateral security provided by borrowers to lending banks so that they are more easily executed and borrowers cannot sue the same collateral to secure loans from several banks.
These are still new initiatives and necessarily will require time to fully perfect and implement. For instance the two licenced credit reference bureau are only now gathering the requisite database on customer credit histories. Thus, the impact on bank’s credit assessment and management has not yet been felt. Expectedly however, over the coming years it will. And as credit risk falls, supposedly, so will the interest margins the banks demand.
In actual fact though, this will be less simplistic. As banks arm themselves with more equity capital they will be hard pressed to increase their income and profits to at least maintain the returns they deliver to their shareholders. This means either expanding their lending or maintaining the wide margins they already insist on. The problem with the former is that increased competition is already forcing the banks to move down-market to win more business and here, the intrinsic credit risks are higher than with the relatively up-market borrowers they have been used to. This could negate the credit assessment and management gains derived from the new initiatives that the Bank of Ghana is promoting on their behalf.
Indeed this is why, even the strengthen financial muscle the banks are now acquiring will not result in a lending explosion, even in the (unlikely) event that the state will maintain its current fiscal discipline in the future and thus never return to the inordinately high level of domestic borrowing that occurred in the 1990s and the past few years.
Indeed, bank lending is shifting somewhat from enterprises towards consumers, as demand for credit from households increased and banks find it easier to provide salary backed loans then anticipated business cash-flow-backed loans. Also, the banking industry’s heavy investment in processes and product and service delivery systems points towards a growing emphasis on fee and commission income from banking transactions, rather than interest income from earning assts. This is prudent in that there is little or no credit risk underlying such income and the increasing sophistication of the banks delivery channels as well as of their customers needs will continue to create demand for non-funded banking products and services.
Ultimately, formal corporate Ghana will have to increasingly look to securitized debt for its funding. Already, companies rely considerably on short-term instruments such as commercial paper for their working capital and the next stage is for banks to begin matching those companies needs directly with the investible funds other bank customers have, taking a fee for this matchmaking rather than an interest margin for being directly in the middle, but which involves significant credit risk.
Gradually the banks, either directly for through investment banking subsidiaries will want to develop the larger term securitized debt market involving corporate bonds. There is already significant activity in the private placement bend market for relatively larger companies.
This lies further ahead though on the horizon. For now the banks are simply looking to reduce the incidence of loan defaults, even as they seek more customers, across more locations in Ghana and develop increasingly sophisticated ICB backed products and services that will make them more attractive to those customers.
Comments