Ghanaian Bankers to Avoid Interest Rates Demise A year ago, Ghanaian bankers were expecting to enter an era of low interest rates. These had been slashed from 18% in early 2010 to 12.5% by July 2011. And with inflation thought to be heading down, many forecasted further cuts. Ghana’s situation soon changed, however. With imports surging and liquidity building up quickly amid strong economic growth, the cedi started to slide in the last quarter of 2011. The problem worsened early this year, with the currency depreciating 15% versus the dollar by mid-June. The central bank, to stem the fall and reduce the supply of cedis in circulation, was forced to increase rates to 15% and tighten lenders’ reserve requirements. Banking Boost Banks have in some ways benefited, thanks to higher trading spreads in the foreign exchange market and yields on government bonds. “There’s volatility in the foreign exchange market, so at the moment banks are making money,” says Alhassan Andani, head of Stanbic Ghana, a subsidiary of Standard Bank. “They are also making money by putting cedis into riskless instruments, the rates of which have gone up.” Yet the outlook over the longer term is a lot less rosy if the cedi’s depreciation is not soon halted. “It’s a gathering storm,” says Mr Andani. “The sum total of the depreciation and higher interest rates will cascade into companies. That’s going to impact banks’ asset quality eventually.” For the moment, the banking sector’s growth has barely slowed. Assets rose 21% to 23bn cedis ($12bn) in the 12 months to the end of April, according to the Ghanaian central bank. And credit to the private sector expanded 37% on an annualised basis in April, compared with 17% a year earlier. But some caution that a deceleration is likely. “With the way rates are going up, I can’t see asset growth of 20% a year continuing,” says Benjamin Dabrah, head of Barclays Ghana. “It’s much more attractive and prudent to be aggressive with your lending when rates are low. “When yields on short-term government paper are so attractive, they serve as an alternative investment for surplus funds in the banking sector. Banks have a tough choice deciding whether to lend risk-free to the government at 18% to 20% or to the private sector at 25%.” Their wariness about the private sector is only heightened by them having among the worst non- performing loan (NPL) ratios in west Africa. Although bad assets have been reduced substantially in the past two years, they stood at 14% of total loans in April, which was partly a consequence of the government in the few years before 2009 building up huge arrears to local companies, many of which subsequently defaulted on their loans. Healthy Balance Ghanaian banks are nonetheless in rude health. Their capital adequacy ratio was a high 17% in April, well above the Bank of Ghana’s 10% threshold. Their earnings are robust, with several having made returns on equity of more than 20% in each of the past few years. And they typically have low loan-to- deposit ratios, meaning they have the capacity to boost their lending. Moreover, the fact they operate in one of the world’s most buoyant economies – gross domestic product (GDP) rose by 14% in 2011 and is expected to do so by about 8% this year – gives them ample opportunity for growth. As such, many bankers think that the asset expansion they have experienced of 30% to 40% annually in recent times can be sustained. “In the next five years, we want to triple our balance sheet,” says Oliver Alawuba, who runs UBA Ghana, a subsidiary of Nigeria’s United Bank for Africa, and which had 570m cedis of assets at the end of last year. Much of Ghana’s economic strength is down to oil, which it began exporting in late 2010. For now, most local lenders are too small to take part in the upstream sector, which offshore banks with far bigger balance sheets tend to dominate. Yet Ghanaian banks are benefiting from the commodity. All are finding opportunities in the oil services industry, which has smaller funding requirements than upstream businesses. They are also confident that increased public spending on infrastructure will generate activity for them. “Higher government revenues from oil will drive spending on roads, schools and hospitals,” says Stanbic’s Mr Andani. “That should provide liquidity in those areas.” Another effect of oil production has been to strengthen trading ties between Ghana and China. Although Chinese companies, particularly construction firms, have been in Ghana for more than a decade, their presence has increased in the past two years. In anticipation of this, Ecobank’s subsidiary in the country set up a China desk. Staffed by employees from Ecobank and Bank of China – the two lenders have an alliance – it advises Chinese companies wanting to invest in Ghana and provides letters of credit to local companies importing goods from the Asian country. Samuel Adjei, Ecobank Ghana’s managing director, says it has already worked on millions of dollars of investments from Chinese firms. Non-oil Robustness Even without its hydrocarbon discovery, Ghana’s economy would be robust. The non-oil sector is expanding rapidly on its own and contributed as much as 60% of last year’s rise in GDP. “There’s growth everywhere you look,” says a banker in Accra, Ghana's capital. “Most banks are taking advantage of this and expanding their balance sheets and profits.” Among the industries being targeted by lenders are telecommunications, transport, mining, retail and trading. Many are also keen to increase their exposure to agriculture. The sector makes up about 30% of the country’s economic output and is its biggest employer. Yet agricultural lending, which is dominated by state-owned Agricultural Development Bank, makes up less than 5% of other banks’ portfolios. The fact that most farmers are smallholders without irrigation hinders their access to credit. The government is investing more in agriculture to increase production of cocoa – of which Ghana is the second biggest grower in the world after Côte d’Ivoire – and cereals such as rice and maize. Banks say this is helping, as is more private sector investment in value-added agricultural industries such as food storage and processing. Taken together, banks say this will reduce the risks involved with agricultural lending. “There’s still a lot of capacity in agriculture,” says Mr Andani. “To imagine that we’re net importers of food, when we have such fertile soils, is inexcusable.” Like agriculture, small and medium-sized enterprises (SMEs) have traditionally received little funding from banks. This is largely because of a lack of transparency and a perception of poor record keeping and fiscal management among them. “The SME sector has tended to be a high-risk one,” says Mr Dabrah at Barclays Ghana. “All these issues have led to banks in Ghana traditionally burning their fingers when they venture into the SME sector. It’s a reality that access to credit is challenging in that space.” As a result, SME lending is not done in the same way as the bigger-scale corporate funding that commercial banks typically specialise in. “The way we assess corporates is completely different from the way we assess SMEs,” says Mr Adjei of Ecobank. SME Takeover To get around this, Ecobank last year bought The Trust Bank (TTB), a specialist lender to small businesses, in a deal that saw it overtake Ghana Commercial Bank to become the biggest lender in the country. It felt that building its SME book organically and hiring bankers with experience of working with such borrowers would have taken too long. Another problem is banks’ inability to identify would-be clients properly, given the lack of an addressing system in many parts of the country. And credit reference bureaux have only existed for three years, which makes it difficult to assess the borrowing history of SMEs. Bankers say that the situation is improving, while the Bank of Ghana’s recent establishment of a collateral registry has helped, too. But they warn that it remains an impediment to credit growth. “We can’t properly identify people,” says Mr Adjei. “We don’t know their addresses. Whatever they provide on their account opening forms we can’t verify. We don’t know if they are faking.” Retail banking and consumer lending hold plenty of potential in Ghana. Banks are particularly keen to tap the middle class, which is rising in tandem with the economy. Providing mortgages is one of the main ways they can do this. Dominic Adu, head of Ghana Home Loans (GHL), one of the biggest mortgage providers in the country, says the size of the market is probably still less than $200m. But demand is increasing. “We don’t have much of a mortgage market here, but there’s pent-up demand for housing,” says Kweku Bedu-Addo, managing director of Standard Chartered Ghana. “It’s an area begging for attention.” Mr Adu, who co-founded GHL in 2006, says the appetite for mortgages was far higher than he had imagined. “In our business plan we thought we’d have done $30m [of mortgages] by year four,” he says. “But at the moment we’ve distributed about $80m. “The cap on our portfolio growth has been supply. There haven’t been enough developments. But we see massive growth in supply from next year. Potentially, the mortgage market could reach about 10% of GDP [or roughly $3bn at today’s level] in the next five years.” Most bankers are similarly bullish. Few fear a bubble being created, thanks to households having low leverage levels. The portfolio of GHL, whose lending practices are similar to those of the banks, has a weighted average loan-to-value ratio of just 55%. It is largely for this reason, says Mr Adu, that its NPL ratio is less than 2.5%. Reaching the Unbanked Nonetheless, the growth of mortgages in Ghana will not be aided by rising interest rates. Bankers say that they were too high to spur the market even before the central bank started to raise rates this year, with borrowers being charged interest of 25% or more. Some mortgage providers, such as GHL, get around the problem by only lending in dollars, which usually means they target borrowers who are paid in US dollars or have their salaries linked to the currency. As such, their mortgages come with rates as low as 12%. Still, for the market to move beyond the middle classes living in Accra and reach places such as Kumasi, Ghana’s second city, and Tamale in the north – let alone smaller towns – lower interest rates are seen as a necessity. The same is true of credit cards. “An improvement in the macroeconomic environment that leads to rates coming down would cause credit cards and mortgages to take off,” says Mr Bedu-Addo. Ghana’s unbanked population, like in the rest of Africa, is high. Far fewer than half of its 24 million people have bank accounts. “Only about 35% of bankable adults are in the formal system,” says Mr Alawuba. “That leaves a huge number of people outside it.” Banks often argue that bringing more Ghanaians into the banking system is an expensive process, especially if it entails them expanding their branch networks into rural areas. “We recognise there’s value in the unbanked population,” says Mr Dabrah. “The challenge is finding service models to reach it at affordable prices. That’s what most banks are focusing on.” Increasingly, Ghanaians are turning to mobile and agency banking, the latter being whereby they use outlets such as corner shops to take deposits and sell services in places where they have no branches. Some believe that Ghana, where mobile banking is in its infancy, has a lot to learn from Kenya, which has managed to increase its banked population substantially in recent years using mobile money transfer services and mobile banking. “We send our people to Kenya all the time,” says Ecobank’s Mr Adjei. “Mobile and agency banking are a way of encouraging rural people to save. Even if it’s just a cedi a day, cultivating that habit is important.” Others say that commercial banks should try to imitate Ghana’s microfinance lenders, which have taken to using roaming sales teams to get rural people to use their products. “Proper banks continue to grow [their retail banking businesses],” says Keli Gadzekpo, head of Databank, a large local investment bank. “But they’re not doing it as fast as microfinance houses, which are being innovative in how they deepen financial services. They’re actually getting services to people’s doorsteps.” Getting more Ghanaians, and small businesses, into the formal system would help lessen the prevalence of cash transactions, one of the banks’ main bugbears. “It’s a big problem,” says Mr Adjei. “We spend a lot of time and resources managing cash. When it comes to businesses, we’d have thought that by now most of their transactions would be done through the banking system without them having to move large amounts of cash. We would prefer them to use cards or even cheques.” Consolidation Looming? Ghana's central bank has given lenders until the end of this year to meet a new minimum capital requirement of 60m cedis, up from 7m cedis previously. Analysts thought this could lead to smaller lenders being taken over. Several welcomed the possibility, believing that the country had too many banks. Ghana has 26, despite its GDP being under $35bn. Nigeria, which has a population six times that of Ghana and an economy about seven times bigger, has just 22 banks. Yet so far Ecobank’s takeover of TTB, itself not triggered by the new regulations, has been the only major deal to emerge. Policy-makers do not explicitly say they want more consolidation, but seem happy to let market forces run their course. “We’ll see some natural integration in the banking sector as we move forward,” says Kwabena Duffuor, minister of finance and economic planning. “It will not happen by any fiat but by the banks seeing the need to work together to acquire bigger market shares and be more competitive.” Even if further consolidation among local banks fails to happen, more foreign lenders could start operating in the country. Some analysts believe South African lenders – Standard Bank is the only one that has a presence in Ghana – will be among them. The attractions of Ghana to foreign lenders are obvious, not least its rapid economic growth and stable politics. Banks are likely to be among the chief beneficiaries of those in the foreseeable future, even if rising rates and a depreciating cedi make for volatility in the short term. 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