Ghana - Non-Bank Financial Institutions Assistance Project

Document of The World Bank Report No. T-6696-GH TECHNICAL ANNEX THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT NOVEMBER 6,1995 Trade, Finance and Investment Division West Central Africa Department Africa Region  CURRENCY EQUIVALENTS (as of 10/20/95) Currency Unit = Cedi US$1.00 = C 1295 Cedis I million = US$772.20 SDR 1.0 = US$1.494 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS AGC - Ashanti Goldfields Corporation ATM - Automated Teller Machines BOG - Bank of Ghana CAS - Country Assistance Strategy CEPS - Customs. Excise and Prevention Services DIC - Divestiture Implementation Committee DVP - Delivery vs Payments ERP - Economic Recovery Program FINSAC - Financial Sector Adjustment Credit GCB - Ghana Commercial Bank GDI - Gross Domestic Investment GDP - Gross Domestic Product GDS - Gross Domestic Savings G P&T - Ghana Post and Telegraph GOG - Government of Ghana GRO - Ghana Reinsurance Organization GSE - Ghana Stock Exchange HFC - Home Finance Company ICAG - Institute of Chartered Accountants Ghana IRS - Internal Revenue Service LTD - Long Term Debt MDPI - Management Development and Productivity Institute MIS - Management Information System MOF - Ministry of Finance NBFI - Non Bank Financial Institutions NIC - National Insurance Commission PCT - Project Coordination and Implementation Team PEED - Private Enterprise and Export Development Project PSD - Private Sector Development Credit PT - Privatization Trust RIR - Reference Interest Rate RTGS - Real Time Gross Settlement SA - Special Account S&L - Savings and Loans SIC - State Insurance Corporation SME - Small and Medium Enterprises Prolect SOE - State Owned Enterprises SRC - Securities Regulatory Commission SSB - Social Security Bank SSNIT - Social Security and National Insurance Trust SWIFT - Society for Worldwide Inter-Bank Financial Telecommunication TOR - Terms of Reference VSAT - Very Small Aperture Terminal  GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT TECHNICAL ANNEX Table of Contents Page No. SECTION A: PROJECT DESCRIPTION ............................... I 1. Country Background ......................................I A. The Economy ....................................... B. Current Macroeconomic Environment ......................................2 C. Financial Sector ......................................3 D. Financial Sector Reform ......................................5 E. Rural and Informal Finance ......................................6 F. Divestiture ......................................6 G. Private Sector Development ......................................6 II. The Remaining Agenda ......................................7 A. Current Problems ......................................7 B. The Non-Bank Financial Sector ......................................8 C. The Institutional Framework ......................................9 Ill. Project Design ..................................... 11 A. Project Objectives and Approach .....................................1 I B. Relation with Other Multilateral Assistance ..................................... 14 C. Project Risks ..................................... 14 D. Project Benefits ..................................... 14 IV. Project Description ...................................... 16 A. Ghana Stock Exchange (GSE) ...................................... 16 B. Securities Regulatory Commission (SRC) ...................................... 18 C. Bank of Ghana ..................................... 19 D. National Insurance Commission (NIC) ..................................... 20 E. State Insurance Corporation ...................................... 22 This report is based on the findings of an appraisal mission that visited Ghana in June 1995. It comprised Messrs. Anil Chandramani (Financial Economist and Task Manager), Claude Sorel (Private Sector Development Specialist), Sunil Datt (Financial Specialist), and Hemant Baijal (Consultant, Economist). Messrs. Dan Mozes (Sr. Financial Specialist) and David Pugh (Sr. Insurance Specialist, IFC) contributed on previous missions and comments were also provided by Messrs. Kaps and Sokol (AF4DR). Mr. Peter Watson and Mr. Olivier Lafourcade are the Division Chief and Department Director, respectively, for this operation. Mr. Said Al Habsy is the Lawyer and Mr. Dimitri Vittas and Mr. David Pugh are the Peer Reviewers for this operation. Ms. Celine Gavach provided secretarial support.  F. Ghana Reinsurance Organization (GRO) ....................................................................... 24 G. Social Security And National Insurance Trust (SSNIT) . ............................................................... 25 H. Associated Infrastructure and Capacity Building .............................................. 27 1. Insurance Industry Training Center ....................................................................... 27 J. Home Finance Company ....................................................................... 28 K. University of Ghana School of Administration .............................. ........................................ 29 L. Institute of Chartered Accountants of Ghana (ICAG) . .................................................................. 29 M. Management Development and Productivity Institute . ................................................................ 29 N. Payment Systems ....................................................................... 29 0. Ministry of Finance (MOF) ...................................................................... 32 SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION .......... 34 A. Project Implementation ...................................................................... 34 B. Onlending Tern s of financing for the beneficiaries ...................................................................... 36 C. Project Costs and Financing Plan ....................................................................... 37 D. Procurement ....................................................................... 37 E. Disbursements ....................................................................... 39 F. Accounts and Audits ...................................................................... 40 G. Terms and Conditions ....................................................................... 41 Attachment 1: Ghana Payment System - Features and Issues ............................................................. 42 Attachment 2: Privatization Trust ...................................................................... 48 SECTION C: PROJECT IMPLEMENTATION PLAN . ....................................... 54 Section C.I: Project Implementation Matrices ...................................................................... 55 Section C.2: Cost Tables (by beneficiary) ...................................................................... 68 Section C.3: Standard processing time for procurement of goods and consultants ......................... 74 Tabe Table 1. Monetary Indicators .4 Table 2. NBFI Project Design Matrix .12 Table 3. Linkages of NBFI Project with other Bank Projects .13 Table 4. Summary of Proposed Procurement Arrangements .39 Table 5. Disbursement .40  SECTION A: PROJECT DESCFIPTION I. COUNTRY BACKGROUND A. The Economy. I . Ghana, a country of about 16 million people, is well endowed with natural resources. The economy has traditionally depended on primary production and exports of cocoa and minerals. Agricultural production, primarily rain fed and small scale, is concentrated on staple food crops and cocoa. Ghana ranks among the world's largest producers and exporters of cocoa. About 60 percent of the Ghanaian labor force is employed in agriculture which accounts for about 45 percent of gross domestic product (GDP). The service sector, consisting largely of trade and public sector services, is the second largest employer, accounting for over 25 percent of the labor force and about 40 percent of real GDP. The industrial sector accounts for about 16 percent of GDP and employment; it is relatively diverse and well developed by Sub-Saharan African standards. 2. Compared to other West African countries, Ghana once enjoyed a relatively high standard of living, but poor economic management during the 1970s and the early 1980s led to a prolonged economic downturn. Expansionary fiscal and monetary policies, high inflation, and an overvalued nominal exchange rate, caused a substantial real appreciation of the currency, leading to external payments imbalance. To mitigate the situation, policymakers imposed a wide range of administrative controls on prices, imports, foreign exchange use and the distribution of goods and services. This policy mix contributed to a downward economic spiral from 1970 to 1982. 3. After a devastating economic performance throughout the 1970s and early 1980s, the Government introduced an Economic Recovery Program (ERP) in 1983 in order to: (a) restore and sustain macroeconomic stability; (b) improve the efficiency of public sector resource management; and (c) create an incentive framework to enhance efficiency, encourage savings and investment, and provide an enabling environment for private sector development. 4. The Government has been implementing a program of wide-ranging financial reforms. It has abolished interest rate controls and sectoral credit ceilings, improved the legal framework governing banking activities, and introduced uniform accounting and auditing standards for all banks. The central bank is strengthening the supervision of banks. A program to restructure the finances and management of distressed banks has been completed. The country has established a small stock exchange, which is expected to be a vehicle for floating shares of public enterprises to be divested. 5. Ghana has a market-determined exchange rate system and a relatively low-tariff trade regime, free of quantitative restrictions. In April 1990, the Government introduced an interbank market supported by a weekly wholesale auction of foreign exchange, with a view to encouraging such transactions among banks. More than half the foreign exchange in the  2 interbank market is supplied by the Central Bank. Foreign exchange transactions at exchange bureaus were also legalized in 1990. The spread between the interbank exchange market and the bureaus has continued to fall, and is currently less than 10 percent. The Government abolished the import licensing system in 1989. Tariffs on imports have been reduced substantially, and excise taxes on imports have been set at par with locally produced goods. Export taxes, except that on cocoa, have been abolished. Tariff and pricing policy in the power and energy sectors has also been improved. 6. The Government has succeeded in mobilizing greater public revenues through tax reform, improved tax collections, and rationalization of consumption taxes and user charges. Public investment has grown from negligible levels at the beginning of the ERP to about 9 percent of GDP in 1993, and the focus has changed from direct investment in productive activities to rehabilitation of economic and social infrastructure, especially roads and human resources development. To better rationalize the public investment program, the Ministry of Finance (MOF) has established a committee, with representatives from sector ministries, which coordinates investments and policies across sectors. B. Current Macroeconomic Environment. 7. Since the election-related fiscal shock of 1992, Ghana's macroeconomic situation has remained fragile. After a number of years of strong macroeconomic performance, there was a marked reversal in fiscal performance during the run-up to the 1992 elections when large wage awards were granted to civil service and other public sector employees. In addition, delays in passing increases in imported oil costs to consumers gave rise to large revenue losses. As a result, the overall budget balance reverted from a surplus position of 1.5 percent of GDP in 1991 to a deficit of 4.8 percent in 1992 and the growth in money supply increased rapidly. 8. There has been a remarkable turnaround in the fiscal balance from a deficit of 4.8 percent of GDP in 1992 to one of 0.8 percent in 1994. If divestiture receipts are included, the fiscal balance was in surplus of 2.2 percent in 1994. However, in 1994 the Bank of Ghana (BOG) was again unable to curtail monetary growth because of unplanned borrowing by the parastatal Ghana National Petroleum Company to cover losses on oil trading and other activities. Despite stepped-up open market operations, money supply grew by 46 percent in 1994, most of it in the last quarter. With GDP growth lower than expected due to untimely rains, inflationary pressures intensified and the average inflation rate for the first seven months of 1995 reached 40 percent. 9. Ghana's external position, after deteriorating in 1992-93, improved substantially in 1994. The external current account deficit rose from 3.6 percent of GDP in 1991 to 9.2 percent of GDP in 1993. From around mid-1993 onward, BOG limited its intervention in the foreign exchange market, thereby allowing a sharp depreciation of the exchange rate. This policy, in conjunction with the strengthening of the fiscal situation and strong export performance, contributed to a reduction in the current account deficit in 1994 to 4.9 percent of GDP. Ghana experienced a shortfall of US$200 million (or nearly 4 percent of GDP) in long-term concessional aid in 1994, but the impact on the overall balance of payments was mitigated by  3 receipts from the divestiture program and short-term external borrowing by the Cocoa Board. Consequently, Ghana's foreign exchange reserves position improved to over four months of imports by the end of 1994, compared with only three months at the end of 1993. 10. The 1995 macroeconomic program, aimed at restoring macroeconomic stability, is supported by a three-year Enhanced Structural Adjustment Facility approved by the IMF Board on June 30, 1995. Implementation of the macroeconomic program is on track. Available data show that Ghana overperformed in the first quarter of 1995. Net domestic financing of the Government budget was below the IMF's program estimate by 1 percent of GDP. Net foreign assets of the Central Bank were better than programmed, and broad money growth was lower than targeted. Nevertheless, price increases intensified in 1995, largely reflecting the strong monetary expansion in the last quarter of 1994 and the one-off revenue measures involving increases in petrol and indirect taxes. Thus, for the 12-month period ending May 1995, the consumer price index rose by 50 percent, compared to 34 percent at the end of 1994. However, inflation is expected to abate if the program remains on track for the remainder of 1995. 11. At the core of the 1995 macroeconomic program--as agreed under the Policy Framework Paper (PFP) 1995-97--are measures designed to secure a fiscal surplus of 1.2 percent of GDP and a money supply growth of 14 percent. Real GDP is projected to grow at 5 percent. Sales tax (including on services), removal of exempted zero-rated tax status for imports, increases in petroleum tax, and re-imposition of withholding tax on interest earnings are among the revenue measures. Wage increases have been restrained to 35 percent in 1995. Notwithstanding an outbreak of civil disturbances in mid-May 1995, which led to the withdrawal of the value added tax, the original PFP fiscal targets are expected to be met. C. Financial Sector. 12. Comparative financial indicators confirm that Ghana's financial system is not very deep. Broad money holdings (M2) are equivalent to about 17 percent of GDP, as compared with 79 percent in Malaysia, 46 percent in Indonesia, 37 percent in Kenya, and 30 percent in Zimbabwe. Reflecting their mistrust of banks, Ghanaians keep nearly half of their total money in currency rather than in bank deposits, as compared to about 10 percent in Indonesia, Thailand, and Malaysia, and 20 percent in Kenya, Zambia, and Zimbabwe. Currency holdings outside of banks are also large relative to total monetary aggregates. The table below shows that the currency intensity of the economy (C/M2) recorded a steady rise, instead of decline, from 28 percent to 38 percent over the past 5 years. In Ghana, not only is the ratio high but the rate of growth of currency in circulation is explosive--four times in the past four years.  4 Table 1: Monetary Indicators (in Cedi Bn.) 1990 1991 1992 1993 1994 Currency 80.04 90.03 183.48 222.20 368.80 M2 283.24 325.78 519.34 661.57 967.36 GDP 2031.70 2574.80 3008.80 3949.00 5186.00 C/M2 28 percent 28 percent 35 percent 34 percent 38 percent M2/GDP 14 percent 13 percent 17 percent 17 percent 19 percent Average 32 percent 28 percent 13 percent 18 percent 24 percent Inflation Source: Bank of Ghana 13. A number of factors have contributed to the low level of participation in the formal financial system. Confidence was undermined when the confidentiality of bank accounts was violated in the early 1980s and later bank-portfolios underwent large scale restructuring. In addition, during the 1970s and 1980s, inflation drove individuals to shift their financial assets into real form to avoid losing the value of their resources. Until recently, low or negative real deposit rates and high transaction costs offered few incentives for holding wealth in banks or otherwise dealing with the formal financial system. 14. Low confidence in the financial system has contributed to Ghana's low recorded savings and investment rates. In fact, gross national savings never rose above 15 percent of GDP. After falling to under 5 percent in 1983, the savings rate recovered but remained below 10 percent. This level compares quite unfavorably with East Asian countries where savings rates of 30 percent are common. Similarly, recorded investment rates are far below levels required to push Ghana into an accelerated growth mode. However, evidence from household surveys suggests that actual savings are much higher than records show, but that most are kept in such nonfinancial forms as inventories or building materials, which are generally not captured in Ghana's national accounts statistics. It is clear that individuals are reluctant to save with formal financial institutions, which hinders effective financial intermediation and depresses the rate of return on capital. 15. Meanwhile, almost all the savings entering the formal financial system have served to satisfy the public sector borrowing requirement, with less than a third of outstanding credit going to the private sector. The incentives created by macroeconomic policy have thus maximized the banks' role as financiers of the government and minimized their role as financiers of the private sector. In view of the credit demand generated by an accelerated pace of divestiture of public enterprises and stronger private sector growth, it is imperative for the government to shift to a fiscal surplus over the next several years. As this happens, the stock of  5 government debt will fall and the financial system will play a much larger role in investment finance, thereby further strengthening confidence in the financial system. D. Financial Sector Reform. 16. Under the ERP, the government began implementing a program of wide-ranging financial reforms. It abolished interest rate controls and sectoral credit ceilings. By introducing a weekly auction of treasury bills, it began to lay the foundation for a system of indirect monetary control. Under the first Financial Sector Adjustment Credit (FINSAC I), prudential regulations were strengthened and actions taken to improve bank supervision. Seven banks were restructured, with some non-performing assets transferred to a newly created government agency, the Non-Performing Assets Recovery Trust. Banks were allowed to set lending and deposit rates freely, and the new banking law guaranteed client confidentiality. 17. In 1989, seeking to improve the country's regulatory and supervisory framework, Ghana enacted a new banking law. Specifically, this law defined capital adequacy and minimum capital requirements, prudential lending guidelines, and financial reporting procedures; imposed sufficient and explicit safeguards against, and penalties for, excessive risk taking; and, standardized and broadened requirements, which are now far more rigorous. Together, these provisions have improved the ability of regulatory authorities to monitor the financial condition of banks. 18. In addition to the enactment of the new banking law, banking sector reform introduced the following new features: the upgrading of BOG's examination and supervision functions and introduction of a new, comprehensive system of returns; improvements in bank examination skills through twinning arrangements and specialized training; introduction of annual examinations; standardization of accounting practices guided a Manual ofAccounting for banks, prepared by BOG; and removal of no explicit entry and exit restrictions in the banking sector. Under the Private Enterprise and Export Development (PEED) Project Ghana's international payments system, its links to the global Society for Worldwide Interbank Financial Telecommunications (SWIFT) system, but left the domestic payments system to be addressed in the future. 19. Under the ongoing FINSAC 11, the focus has been on reducing policy distortions in the financial system by encouraging positive real interest rates. Competition in the banking system is to be increased through the divestiture of public sector shareholdings in banks. To improve the legal and regulatory framework applicable to non-bank financial institutions (NBFI), a new Non-Bank Financial Institutions Act has been introduced, although this subsector has so far played a relatively small role in the financial system as a whole. 20. Despite these financial reforms, further actions are needed to strengthen confidence in the sector--and therefore increase the level of savings and intermediation by formal financial institutions. Regulation and supervision must be strengthened to build public confidence in the financial system and to become an effective intermediary and promote investments in the private sector rather than the purchase of government paper.  6 E. Rural and Informal Finance. 21. Rural financial markets in Ghana consist of formal institutions, such as branches of commercial banks and rural banks, and informal institutions, such as susu collectors (informal deposit takers). Both play an important role in intermediating between savers and investors. Thus far, Ghana's rural financial institutions have not been able to provide people in the countryside with adequate access to savings or credit, particularly in the agricultural sector. The Rural Finance Project, which has closed recently, addressed some of the issues related to rural finance institutions. The project contributed to financial restructuring of rural financial institutions, including privately owned rural banks and credit unions, by enabling them to mobilize more deposits and increase the flow of credit to the dominant sector of the economy. The ongoing Small and Medium Enterprises (SME) Project is addressing some issues related to the financing needs of small and medium enterprises. F. Divestiture. 22. Recently there has been positive change in the Government's attitude towards the private sector. The policy environment for the private sector has improved. The public-private sector dialogue initiated in 1991 has been broadened and strengthened through the Private Sector Roundtable and the Private Enterprise Foundation. Changes in policies include the Statutory Corporations Act under which public corporations are converted into companies with salable shares and a new, more liberal Investment Act that was approved in November 1994. 23. After many years of hesitation, Ghana's privatization program has begun to pick up steam. The sale of Ashanti Goldfields Corporation (AGC) marked an important threshold in generating broad-based support for privatization and in signaling the Government's support for the private sector. The subsequent sale of the Government's minority holdings --to international fund managers--in seven companies listed on the Ghana Stock Exchange has reinforced that support. The Divestiture Implementation Committee (DIC) has recently sold ten more State-Owned Enterprises (SOE) to the private sector. New and more transparent procedures for divestiture, including the subcontracting of the implementation of divestiture to private firms, have been approved by the Cabinet. The divestiture of three commercial banks now being implemented by international financial advisors will strengthen the process. The recent decision to seek private participation in the telecommunication sector is expected to mark another important threshold. The Government has also announced its decision to open the power sector to private participation. It is important now to sustain these positive signals and ensure that the lingering doubts of the past on private sector development do not reappear. G. Private Sector Development. 24. As a part of the ongoing commitment to strengthening and deepening the nascent private sector, two projects are being implemented. The first, PEED, in cooperation with United States Agency for International Development's (USAID) Trade and Investment Program, is supporting the general area of export finance and its attendant needs. The second project, the Private Sector Development (PSD) Credit, is aimed at strengthening the technical  7 capacity of both public sector research and development as well as the private sector itself. In addition, technical assistance is being provided to strengthen the institutional capacity of the commercial judicial system. II. THE REMAINING AGENDA A. Current Problems. 25. Ghana has achieved significant economic progress in the last ten years as a result of the broad-based adjustment strategy adopted under the ERP. However, there is concern that the economy has not yet been able to generate higher growth. This is, in part, due to the fact that Ghana has not yet achieved much success in the mobilization and allocation of domestic and foreign capital, which are key factors in stimulating private sector-led growth. 26. Firstly, on the domestic front, both gross domestic savings (GDS) and gross domestic investment (GDI) as proportions of GDP have fallen below 10 percent since 1980, much lower than in the developing countries in Asia. However, household survey data show that significant amounts of household savings (about 10 percent to 15 percent of GDP) are held in the form of non-financial assets, which results in an inefficient use of scarce savings. Also, the formal financial sector has been unable to mobilize adequate amounts of equity and medium - to -long term financing. The recently completed Ghana Financial Sector Report (Report Number GH-1 3423, dated December 29, 1994) concludes that one factor that has contributed significantly to the low formal savings and investment rates ispoorfinancial intermediation in the economy. Ghana also lacks an efficient domestic payments system necessary to provide fast and convenient transactions to the entire financial system. Despite improvements in the banking industry, the creation of effective institutions to intermediate financial flows between domestic savers and investors has been hampered by the weakness of NBFI. These NBFI often play very important roles in increasing the mobilization of savings, particularly the term savings necessary to promote equity and term financing. Since Ghana has been achieving significant progress under the broad macroeconomic and banking sector reform programs, it is now necessary for it to turn its attention to the development of a competitive, efficient and well supervised non-bank financial sector to improve the mobilization of domestic capital, which in turn would encourage increased savings mobilization from the formal and informal sectors. 27. Secondly, in an era where it is increasingly desirable for declining official flows to be replaced by private flows, the economy has begun to attract interest from both direct and portfolio foreign investors and from the large number of Ghanaian residents abroad. This is evident from the success of the local and foreign portions of Ashanti Goldfields Corporation (AGC) share issues and the sale of GOG minority holdings to foreign portfolio investors. Yet, Ghana lacks the well developed institutional infrastructure necessary to take advantage of these developments to build true "emerging market" status for its economy. Ghana must now seek to develop the institutions, instruments and incentives necessary to attract sustainableforeign private investmentflows into its economy.  8 28. The Ghana Financial Sector Report concluded that effective financial intermediation will require: (a) the promotion of greater competition and more innovation in the sector (involving divestiture and well supervised entry and exit); (b) the strengthening of the financial and legal infrastructure (including human resource development, better payments system, especially cash management, and improved information on enforcement of contracts); and (c) the integration of the formal and informal financial sectors. While previous IDA operations have gone a long way in addressing problems in the banking sector, improving their financial infrastructure, and promoting competition in the banking industry, issues related to the non-bank financial sector have not been explicitly addressed until now. 29. In the Ghanaian payment system, check clearance and settlement is still slow and manual. Checks are not standardized. Risks are insufficiently covered because there are gaps in the legal infrastructure governing payments, clearing and settlement. There are inefficiencies in the flow of Government funds due to inadequate information flows. The technological infrastructure needed for modem money and securities markets needs to be put in place, and skills enhanced for that purpose. Modernization of the domestic payments system would lead to improvements in the efficiency of financial transactions, monetary management and the receipt and disbursal of public finances. The first step would be a review of possible alternative designs for the payments system incorporating the needs of all major users, such as the financial institutions (commercial banks, securities institutions, etc.), BOG, and Government Agencies such as the Customs, Excise and Prevention Service (CEPS) and the Internal Revenue Service (IRS). B. The Non-Bank Financial Sector. 30. Currently, the non-bank financial sector in Ghana is small, contributing only about 24 percent of the total financial assets in the country, with 11 percent in the government-owned Social Security and National Insurance Trust (SSNIT) and 4 percent on the stock exchange. As a comparison, in South Korea, NBFI accounted for 61 percent of total financial assets in 1992, up from 49 percent in 1987. Though the non-bank financial sector is diverse, apart from SSNIT, the other NBFI are small and do not appear to be developing as expected. The Ghana Stock Exchange (GSE) has only 18 companies listed, but is expected to benefit from the excellent response to the recent privatization of AGC and seven other companies in which GOG has minority interests. There are sixteen insurance companies but the industry is dominated by two state-owned firms. Other NBFI include five recently established merchant banks, the Home Finance Company (HFC), building societies, one unit trust, one venture capital company, two discount houses, and three leasing companies. Except for SSNIT and HFC (which follow commercial management practices) and two major insurance sector institutions, other NBFI are privately owned. With appropriate technical support, these NBFI could be strengthened to make financial intermediation more effective so that this sector can realize its potential for mobilizing and investing the capital required to generate higher growth in the economy.  9 31. The non-bank financial sector faces many of the same obstacles as the formal banking sector. State dominance and a poor regulatory environment have limited the role of private NBFI, which in turn has inhibited the development of new financial instruments that could allow portfolio managers to hedge risks in an unstable macroeconomic environment. Macroeconomic instability and lack of confidence in the formal financial system have also limited their ability to mobilize savings. As a result, NBFI have been largely unable to provide equity and long-term finance to the private sector. 32. In many countries, savers use contractual savings institutions (life insurance companies, occupational pension schemes, national provident funds, and funded social security systems) and collective savings institutions (mutual funds and unit trusts) to diversify risks. Because of their size, the portfolios of these institutions are typically managed by specialists. Small savers thus benefit from the expertise provided by fund managers and often achieve returns on their savings in excess of commercial bank deposit rates. Because of their long term and generally predictable liability structure, contractual savings institutions can also be a good source of long-term financing for private investment. Most countries which have diversified financial sectors, private sector corporations raise funds through the issuance of corporate bonds and shares which are supported by contractual savings institutions. In Ghana, however, contractual savings institutions have not yet sufficiently developed to perform these functions effectively. 33. GOG is concerned about the inadequacy of financial services available to consumers, both individual and small and micro enterprises, both in urban and rural areas. It would, therefore, like to review alternatives for expanding financial intermediation in informal, rural and small sectors, including informal and formal institutions, banks and non-bank institutions. C. The Institutional Framework. 34. With the exception of pension funds, capital market institutions, HFC and insurance companies, the operations of NBFI are governed by Ghana's NBFI Law, 1993. Enacted as part of the financial sector reform, this law provides an adequate framework for diversifying the financial system and creating competition for banks. It confers on BOG the power to license and regulate the nine specific categories of NBFI such as, leasing companies, mortgage financing companies, savings and loans, finance houses, credit unions, discount houses, acceptance houses, venture capital funding companies and building societies. 35. Under the NBFI Law, BOG also has executive powers to issue subsidiary legislation and rules to regulate the operations of NBFI in general, or of a particular category of NBFI as listed in the Law. BOG has therefore drafted a set of regulations to flesh out some of the general provisions of the 1993 Law. Key features of the proposed regulations include: (a) A standardized set of explicit and transparent terms and conditions of licensing covering all requirements mentioned generally under the NBFI Law. The licensing terms allow BOG the right to conduct on-site inspections, which was not stated explicitly in the NBFI Law.  10 (b) While the 1993 Law sets the minimum capital at