Ghana - Non-Bank Financial Institutions Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6696-GH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 16.0 MILLION TO THE REPUBLIC OF GHANA FOR A NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT NOVEMBER 6,1995 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of 10/20/95) Currency Unit Cedi US$1.00 Cedis 1,295 Cedis I million US$772.20 SDR 1.0 US$1.494 ABBREVIATIONS AND ACRONYMS AGC - Ashanti Goldfields Corporation ATM - Automated Teller Machines BOG - Bank of Ghana CAS - Country Assistance Strategy DANIDA - Danish International Development Agency ERP - Economic Recovery Program FINSAC - Financial Sector Adjustment Credit GDI - Gross Domestic Investment GDP - Gross Domestic Product GDS - Gross Domestic Savings GOG - Government of Ghana GRO - Ghana Reinsurance Organization GSE - Ghana Stock Exchange HFC - Home Finance Company ICAG - Institute of Chartered Accountants of Ghana IRS - Internal Revenue Service MIS - Management Information Systems MOF - Ministry of Finance MDPI - Management Development and Productivity Institute NBFI - Non-Bank Financial Institutions NIC - National Insurance Commission PCT - Project Coordination and Implementation Team PEED - Private Enterprise and Export Development Project PT - Privatization Trust RTGS - Real Time Gross Settlement System SIC - State Insurance Corporation SOE - State Owned Enterprises SRC - Securities Regulatory Commission SSNIT - Social Security and National Insurance Trust SWIFT - Society for Worldwide Inter-Bank Financial Telecommunications TOR - Terms of Reference VSAT - Very Small Aperture Terminal FISCAL YEAR January I - December 31  FOR OFFICIAL USE ONLY THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT Credit and Project Summary Borrower: Government of the Republic of Ghana Implementing Agency: Ministry of Finance (MOF) Beneficiaries: Ghana Stock Exchange (GSE); Securities Regulatory Commission (SRC); Bank of Ghana (BOG); National Insurance Commission (NIC); State Insurance Corporation (SIC); Ghana Reinsurance Organization (GRO); Social Security and National Insurance Trust (SSNIT); Home Finance Company (HFC); School of Administration at University of Ghana; Institute of Chartered Accountants of Ghana (ICAG); and Ministry of Finance (MOF) Poverty: Not applicable. However, indirect benefits are expected to accrue to the poor through growth enhancing effects of improved financial intermediation in the rural and informal sectors. Amount: SDR 16 million (US$23.9 million equivalent) Terms: Standard IDA terms with a 40 year maturity Financing Plan: Local Foreign Total ------------US$ million------------ (net of taxes and duties) Government 0.5 -- 0.5 IDA -- 23.9 23.9 Beneficiaries 0.5 -- 0.5 TOTAL 1.0 23.9 24.9 Economic Rate of Return: Not Applicable Staff Appraisal Report: Not Applicable Technical Annex: T-6696-GH Map: IBRD 23606 This document has a restricted distribution and may be used by recipients only in the performance of their lofficialduties. Its contents may not otherwise be disclosed without World Bank authorization.   MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GHANA FOR A NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Republic of Ghana for SDR 16 million (US$23.9 million equivalent) on standard IDA terms with a maturity of 40 years, to help finance a Non-Bank Financial Institutions Assistance Project. 2. Part of the proceeds of the Credit (equivalent to US$2.3 million) would be relent to revenue-generating beneficiaries for ten years including three years of grace at a market- determined variable interest rate. The balance of the Credit (equivalent to US$21.6 million) would be used by the Ministry of Finance (MOF) and passed on to non-revenue generating beneficiaries as grants. The Government of the Republic of Ghana will bear the foreign exchange risk. 3. The Economy. 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 GDP. The service sector, consisting largely of trade and public sector services, is the second largest employer, with over 25 percent of the labor force and accounts for just under 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. 4. 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. As a result, 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. 5. Current Macroeconomic Background. 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 the 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 reverted from a surplus position of 1.5 percent of GDP in 1991 to a deficit of 4.8 percent in 1992  - 2 - and growth in money supply expanded rapidly. There has been a remarkable turnaround in the fiscal balance from a deficit of 4.8 percent of GDP in 1992 to 0.8 percent in 1994. Including divestiture receipts, 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. Since the election-related fiscal shock of 1992, Ghana's macroeconomic situation has remained fragile. Despite stepped-up open market operations, the 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 average inflation for the first seven months of 1995 reached 40 percent. 6. 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. 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 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. 7. The 1995 macroeconomic program, aimed at restoring macroeconomic stability, is supported by a three-year Enhanced Structural Adjustment Facility (ESAF) approved by the IMF Board on June 30, 1995. Implementation of the macroeconomic program is on track. 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. Notwithstanding an outbreak of civil disturbances in mid-May 1995 which led to the withdrawal of the value added tax (VAT), the original PFP fiscal targets are expected to be met. 8. Country/Sector Background. 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. 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. 9. 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  - 3 - in the 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 bureaus has continued to fall, and is currently less than 10 percent. Thus broad sectoral policies have been put in place satisfactorily. 10. 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. Under the second Financial Sector Adjustment Credit (FINSAC II), the Government of Ghana (GOG) has also undertaken to divest its majority ownership in Ghana's three largest state-owned commercial banks. The Government has put in place independent, international financial advisors to prepare and coordinate the divestiture program. The first step in the divestiture of the Social Security Bank, the public offering of 15 percent of the bank's equity, has been completed. Preparation for the divestiture of the other two banks, including Ghana Commercial Bank which is the largest bank in the country, is underway. 11. Project Rationale. 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's growth performance have fallen short of expectations. This is, in part, due to the fact that Ghana has not yet achieved much success in the mobilization and allocation of domestic andforeign private capital, which are key factors in stimulating private sector-led growth. 12. 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- 13423, dated December 29, 1994) concludes that one factor that has contributed significantly to the low formal savings and investment rates is poor financial 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 non-bank financial institutions (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  - 4 - 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. 13. 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. 14. 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. 15. The Bank's involvement in Ghana's financial sector started in 1987. It has focused primarily on strengthening BOG and building stronger banking institutions at the core of a more responsive banking system. The two Financial Sector Adjustment Credits (FINSAC I, 1988, and FINSAC II, 1991) have supported the development of the banking sector by improving the regulatory framework, building capacity at BOG, restructuring distressed banks, and divesting public ownership in banks. In addition, the Small and Medium Enterprises and Rural Finance Projects have dealt with some issues related to informal and rural finance institutions. The next step, which is the focus of this project, is to strengthen NBFI and some associated financial infrastructure, by building on initiatives such as the promulgation of the NBFI Law, 1993 (which deals with nine specific categories of NBFI such as mortgage finance institutions, finance companies, savings and loans, etc.) and the revision of the Securities Industry Law, 1993. 16. 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  - 5 - 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 16 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. 17. Project Objectives. The proposed credit has two objectives. The first is to promote the growth of an efficient, competitive, well regulated, non-bank financial sector and an efficient payments system in order to: (a) increase the mobilization of domestic savings in both formal and informal sectors; (b) facilitate the flow of international capital into Ghana through better financial intermediation; and (c) supply financial services competitively to the economy. The second is to create an environment conducive to greater private sector activity and support the successful implementation of the divestiture program for state-owned enterprises (SOE) and the three largest state-owned commercial banks. 18. The project seeks to strengthen institutions and introduce instruments which would create conditions to encourage substantial amounts of savings held in informal, non- financial assets to move to the formal financial sector where they can be used more productively. Different institutions in the non-bank financial sector are at different stages of development and specific interventions have been designed in each sub-sector to support the institutions, instruments and incentives required to: (a) create sound legislative and regulatory frameworks for each sub-sector; (b) develop appropriate organization structures; (c) achieve improvements in operational efficiency; (d) increase competition and support divestiture where necessary; (e) build local capacity; (f) develop instruments necessary for increased savings mobilization to ensure efficient and secure financial intermediation; and (g) promote institutions and instruments to improve the provision of financial services to the informal and rural sectors so that institutions in these sectors can be strengthened and become part of the formal financial sector. This approach emanates from the Government's strategy for the development of the non-bank financial sector as mentioned in the Letter of Sector Strategy dated October 13, 1995 (Annex 1). 19. Project Design. The project design is summarized in Annex 2, which shows the technical assistance planned. Specifically, for each beneficiary, the project would support one or more of the following: (a) legislative reforms; (b) regulatory reforms and strengthening of regulatory capacity; (c) organization structuring; (d) institution building; (e) building local capacity through technical, managerial and market development training; (f) greater competition and divestiture of GOG shareholding; and (g) market and product development. Project design builds on the findings of the Ghana Financial Sector Report and ongoing financial sector work under other projects, such as FINSAC II, the Private  - 6 - Enterprise and Export Development (PEED) Project, the Private Sector Adjustment Credit (PSAC), etc. A summary of these linkages is provided in Annex 3. 20. Project Description. The project addresses identified gaps in the non-bank financial sector including: Capital Markets Institutions such as GSE, Securities Regulatory Commission (SRC), and BOG, and Contractual Savings Institutions such as National Insurance Commission (NIC), State Insurance Corporation (SIC), Ghana Reinsurance Organization (GRO), and SSNIT. The project also provides for Associated Financial Infrastructure (domestic payments system) and Capacity Building in the NBFI sector through the School of Administration at the University of Ghana, the Institute of Chartered Accountants of Ghana (ICAG) and HFC, and Diagnostic Studies at MOF to enable GOG to prepare strategies for future actions in expanding the provision of financial services to rural and informal sectors. A detailed description of the project components is provided in Annex 4. 21. Project Cost and Financing. The estimated project cost, including contingencies, is US$24.9 million equivalent. IDA would finance US$23.9 million equivalent (100 percent of the foreign exchange and 90 percent of local costs) and the remaining US$1 million will come from the beneficiaries (US$0.5 million) and GOG (US$0.5 million). A breakdown of project costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements, and the disbursement schedule are shown in Schedule C. A timetable of key project processing events and the status of Bank Group operations in Ghana are presented in Schedules D and E, respectively. 22. Project Implementation. Though the project has eleven beneficiaries, the program design has been kept as simple as possible. With very few exceptions, the program for each beneficiary is independent from that of other beneficiaries. This structure of parallel but unrelated programs minimizes complexity in the implementation of the project. Nevertheless, the role of the implementing agency is critical in view of coordination required for the effective supervision of the large number of beneficiaries. It has been agreed with GOG that MOF will be the implementing agency for this project. For this purpose, a Project Coordinating and Implementation Team (PCT) consisting of an advisor with experience in private sector NBFI and one support staff, has been established at MOF under the chairmanship of the Deputy Minister of Finance. Each beneficiary will appoint a representative to PCT to assist in project administration and implementation. While each beneficiary would have primary responsibility for the implementation of its own components, the PCT would be responsible for coordinating and monitoring the implementation of the project, and for reporting to IDA as defined in the draft Project Implementation Manual to be adopted by the time of credit effectiveness. The PCT would be the vehicle for coordination, contact, follow-up and reporting between IDA and the beneficiaries. 23. The PCT would require accounting and financial management services to oversee the project's financial aspects which would be provided by an independent accounting firm, on a part-time basis. All Project Accounts, the Special Accounts, the Statements of  Expenditure and the Financial Statements of the project beneficiaries would be audited at the end of each fiscal year by independent auditors acceptable to the Bank, based on accounting data produced by the independent accounting firm. While each beneficiary would have primary responsibility for procurement related to its components, its representative to PCT would update Procurement Schedules and provide reports on related activities to ensure compliance with IDA requirements. Agreement has been reached with GOG on the standard processing time for procurement of goods and consultants. The PCT would hire the services of a procurement and disbursement specialist (familiar with Bank processes and guidelines) to assist the beneficiaries in the preparation and evaluation of bid documents to ensure consistency with Bank guidelines. 24. Semi-annual project implementation reviews would be conducted by IDA together with each beneficiary to review the implementation of all components, including the status of procurement and disbursement. Supervision reviews, including a joint IDA-GOG mid- term review, would monitor the overall project execution, key project activities, project implementation schedule, and supervision plans. They will also identify implementation issues and develop solutions. Following project completion, scheduled for December 31, 1999, a project implementation completion report would be prepared by IDA and GOG. 25. Though MOF, through PCT, would have the overall responsibility for coordination, it will utilize outside resources for the execution of the project. Consultants, contractors and suppliers would be selected in accordance with the Bank guidelines, on the basis of proven experience in the financial sector. In line with the Bank's Africa Regional guidelines, wherever possible, local consultants will be used. Where foreign consultants are used for lack of requisite local skills, special attention will be given to promote transfer of skills to the domestic industry using local counterpart teams. Consultant and advisor contracts would include provisions for training and transfer of skills (e.g., through shared management) to local counterparts to carry on with the program independently. Each beneficiary would therefore appoint counterparts who would work closely with the advisor and would also make adequate preparations before the arrival of the advisor in order to ensure the effective utilization of his services. 26. Monitoring and Reporting. Monitoring of the implementation of various components and sub-components for each beneficiary under the project will be carried out through regular supervision by the Bank and GOG in accordance with the key performance indicators given in Schedule B2. Each beneficiary will submit an annual workplan to the Bank and the implementation agency. MOF, the beneficiaries and the Bank will determine if modifications to the workplan are needed. The project monitoring indicators will be reviewed at the first semi-annual project implementation review and at the mid-term and final reviews of the project. 27. Lessons Learned from Previous IDA Operations. The experience with financial sector technical assistance projects in Africa has been mixed. Inability to generate higher growth and to improve mobilization of savings have been attributed to: (a) the macroeconomic policy framework being significantly off-track, as well as unfavorable  - 8 - sector specific conditions (e.g., credit controls, fixed interest rates, etc.); (b) the lack of government ownership and beneficiary participation in project design and absence of political commitment to reforms which could also result in slow disbursement; (c) weak project management capacity; and (d) lack of supporting financial infrastructure, such as an efficient payments system, strong institutions, appropriate legal framework, etc. 28. Learning from the above, this project has been prepared in close collaboration with all stakeholders, the beneficiaries, GOG, BOG, and the financial community in Ghana, to ensure the strongest possible commitment. These stakeholders also participated in the preparation of the Ghana Financial Sector Report. GOG, in its Letter of Sector Strategy, has reaffirmed its support for strengthening and deepening the non-bank financial sector. The issues of macroeconomic framework and the project management capacity are addressed in the risks section. Finally, improving the quality of supporting financial infrastructure is being addressed under this project as well as under other projects such as FINSAC II and PEED. The success of recent privatizations, such as Ashanti Goldfields, and implementation of an ambitious divestiture program show GOG's commitment to continuing reforms as well as the potential for significant improvements. The timing for this project is appropriate because GOG has completed significant macroeconomic reforms and a restructuring of the banking sector and is now embarked on a comprehensive divestiture program. 29. Rationale for IDA Involvement. The project is fully consistent with the Country Assistance Strategy (CAS) discussed by the Board in May 1995. The project directly supports two of thefive key elements of the Bank Group's strategy outlined in the CAS: private sector development and capacity building. Private Sector Development: each component of the project is targeted at supporting greater private participation in the development of the non-bank financial sector and in building local capacity in the sector. The project also seeks to create an enabling legislative, regulatory and supervisory environment in support of greater private participation in the non-bank financial sector. The development of this sector, including stock exchange institutions, insurance companies, pension funds and mortgage financing institutions, would in turn play an important role in the development of the real sector and in promoting greater private investment, both local and foreign. Capacity Building: one of the important objectives of this project is to develop and strengthen facilities and institutions involved in building capacity in various sub-sectors of the non-bank financial sector. Support, therefore, has been provided at three levels: the formal degree program at the university level; professional certification programs by associations; and skills upgrading programs by various industry-wide institutions. 30. The project is part of the Government's strategy to strengthen the financial sector through increased domestic resource mobilization, the weakness of which has been cited by the private sector and by the CAS as a constraint to private sector development. The benefits to the economy of a comprehensive reform of the non-bank financial sector go far beyond the gains to individual beneficiaries and form part of the broader sectoral reform strategy that IDA and GOG have been working on. The Bank's continued involvement  -9- would complement the reforms initiated under FINSAC I and II. Bank support is also important in coordinating efforts of various donors, such as USAID and DANIDA, who have shown interest in supporting reforms in this sector and who look to the Bank for leadership in the reform of the non-bank financial sector. This is also supported by GOG because it allows for the optimal utilization of the available implementation capacity. 31. Agreed Actions. The following will take place prior to credit effectiveness: (a) employment of an independent accounting firm and an independent auditor acceptable to the Bank; (b) employment of a technical advisor within the PCT; (c) adoption of the Implementation Manual by the borrower; and (d) subsidiary loan agreements to be signed between GOG and the three revenue earning beneficiaries (SIC, GRO and HFC) and subsidiary grant agreements with at least three beneficiaries. 32. Poverty Category. Two components of this project, the technical assistance for expanding provisions of financial services to informal and rural sectors, and the payments system (postal giro), would contribute to the objective of poverty reduction indirectly. The components would enable traditionally disadvantaged segments of the population to establish greater access to financial facilities, for both savings and credit, and thereby to additional opportunities for income generation. The Very Small Aperture Terminal (VSAT) design would help establish better links between rural/semi-urban areas and the urban centers which would allow better geographical targeting of vulnerable groups. 33. Environmental Aspects. The project is rated a Category C project as there are no related environmental issues in the project. 34. Program Objective Categories. The project supports IDA's private sector development and economic management objectives. 35. Participatory Approach. The project has evolved through continuous dialogue with the financial community in Ghana, the beneficiaries, and GOG, starting from their close involvement in the preparation of the Ghana Financial Sector Report, which included a diagnostic review of the requirements for the reform of the non-bank financial sector. The suggestions of these stakeholders have been incorporated in the project design and each beneficiary has full ownership of its components. 36. Project Benefits. This technical assistance project will strengthen the capacity of the non-bank financial institutions by enhancing the human resource base of the institutions under the project, by improving the payments system (including a nationwide cash management system) and by promoting greater competition among the non-bank financial institutions through adequate supervision, privatization of insurance companies and entry of new firms. This is expected to accelerate innovation in financial services, including increased availability of term financing (equity and loans), which is currently a critical constraint to private sector growth.  - 10- 37. Strengthening the financial infrastructure and increasing competition will help improve domestic resource mobilization and make financial intermediation more effective, which in turn would make the allocation of investible resources more efficient. The impact that this would have on economic growth has been analyzed in Annex 5. Economic Analysis Tables and the Key Performance Indicators are shown in Schedule B13 and B2, respectively. The CAS envisages numerous policies and programs that would decrease Ghana's reliance on public savings and foreign aid as sources of investment financing in order to increase reliance on private domestic savings and foreign capital. CAS projections forecast Ghana's dependence on aid to decline over the medium term--gross national savings are projected to grow from 7 percent of GDP in 1994 to 15 percent in 2000 and GDI from 16 percent to around 20 percent of GDP during the same period. Most of the projected growth in savings (private savings to rise from 2.5 percent to 10 percent of GDP) and investment would originate in the private sector, provided adequate policies are in place. 38. Even by sub-Saharan standards, Ghana's recorded savings and investment rates are much lower than that of comparable developing countries, though, micro level survey data reveal that household savings rates are substantially higher. As discussed in the Financial Sector Report, savers in Ghana tend to hold savings in the form of non-financial real assets, such as building materials or inventories which are generally neither captured in the national accounts nor are these savings available to contribute productively to sustained growth. The reluctance of individuals to save within the formal financial sector hampers effective financial intermediation and depresses growth because savings are not invested in activities with the highest rates of return. Ghana's financial system is not deep. This is reflected by low broad money holdings (M2) of about 17 percent of GDP compared to 79 percent in Malaysia, 37 percent in Kenya and 30 percent in Zimbabwe. Ghanaians also keep nearly half of their monetary assets in currency compared to currency-to-deposit ratios of 10 percent in Thailand and Malaysia, and about 20 percent in Kenya and Zimbabwe. 39. This project will also indirectly contribute to poverty reduction, the central objective of the Bank's program in Ghana. One-third of Ghana's population, or about five million people, live below the poverty line. Three-fourths of the poor live in rural and semi-urban areas and it is in these areas that access to financial services is the most difficult. Although Ghana's informal financial sector is large, with an estimated 45 percent of all private sector financial savings mobilized through informal channels, its capacity to intermediate between savers and investors is limited in part by the poor linkages between the informal and formal sectors. This is because formal providers of financial services are concentrated geographically in a few urban centers and because formal financial institutions discourage small and micro clients even in areas where they are present. But the informal sector's capability to mobilize savings and its information base are valuable assets which formal institutions would like to access if the technology could be identified and demonstrated. There may be other opportunities for profitable interlinkages between the informal and the formal sectors, such as bringing savings generated by susu collectors (informal deposit takers) into the formal sector or allowing traders to access formal credit by simplifying the use of collateral. It is thus necessary to establish institutions and  - I1 - introduce instruments that can most appropriately satisfy the savings and credit needs of those segments of the population which are not currently serviced by the formal financial sector, particularly the creation of the infrastructure to link rural and semi-urban areas to urban areas and the informal financial sector to the formal sector. Improving access to financial services is expected to generate new sources of livelihood for this segment of the population and thus contribute to poverty reduction. To the extent that diagnostic work on small scale and informal finance, proposed under the project, will lead to the implementation of new mechanisms for mobilizing savings and providing credit to the poor and micro-enterprises, the project will contribute to reducing poverty more directly at a later date. 40. Project Sustainability. The project would contribute to the development of a more competitive and better-regulated non-bank financial sector and an efficient modem payments system. The project design, which emphasizes strong ownership by GOG and the financial community, favors building local capacity, strengthening institutional capabilities, and promoting local training capacity to ensure a high degree of sustainability. GOG's role in the sector would focus on preparing a suitable legislative framework and ensuring an appropriate degree of prudential regulation to encourage the participation of private NBFI. The design of the project has also benefited from the participation of IFC, which has promoted several NBFI in Ghana, including the stock exchange, one discount house, a leasing company and a merchant bank. Although the project has benefited from consultations with IFC, it is not expected to offer opportunities for direct IFC debt or equity investments. However, IFC staff have participated in project missions because this project seeks to create an enabling environment for possible IFC participation in the non-bank financial sector, particularly in the insurance sector. 41. Risks. This is a low risk project. There are two main risks associated with the project, one exogenous and one endogenous. The exogenous risk is that if GOG allows any laxity in fiscal and monetary policies, it could lead to further currency depreciation and increased inflationary pressure. Moreover, the current high interest rate levels on BOG treasury bills undermine NBFI incentives to intermediate and lend to the private sector. The Govermment, however, has recently tightened its fiscal and monetary policies in line with the understandings with the Bank and IMF to address this issue and ongoing parallel dialogue is expected to lead to increased price stability and, thus, to a lower interest rate structure. 42. The endogenous risk is that reform of three or four sub-sectors simultaneously might stretch the absorptive capacity at the industry and ministry levels, and at the level of some specific beneficiaries. At the industry and ministry level, this risk is being addressed through a decentralized implementation arrangement, with adequate independence and autonomy for each beneficiary, supported by assistance from the PCT supervised by an expert on non-bank financial institutions. This project advisor, supported by a consultant familiar with Bank's procurement and disbursement procedures, would assist individual beneficiaries in procurement, disbursement, accounts and audits and other reporting requirements. The fact that each beneficiary was successfully able to formulate the TORs  - 12- for each component, with assistance from the project team, is an indicator that the beneficiaries have adequate in-house capacity to undertake the reform effort. Also, the mid-term review includes conditions that require timely implementation, thereby allowing for corrective actions and minimizing the risk. 43. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. James D. Wolfensohn President Washington, D.C. 11/06/95 Attachments  - 13 - Schedule A Page 1 of I THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT Estimated Costs and Financing Plan (project cost in US$ '000) Local Foreign Total Estimated Project Cost a Equipment Expenditure 1,705 8,270 9,975 Consultancy Expenditure 3,170 4,685 7,855 Training 2,575 2,150 4,725 Operating Costs 100 0 100 Base Cost 7,550 15,105 22,655 Physical contingencies 0 0 0 Price contingencies 22m 1250 2.245 Total Project Cost 8,545 16,355 24,900 Total Financing Required 845 16.3 24.900 Financing PIan Government 500 0 500 Beneficiaries 500 0 500 IDA 7 545 16,3S5 23,900 Total 8545 16.135 24.900 Net of taxes and duties  THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT Economic Analysis Benefits Most of the beneficiary institutions under this project are non-revenue generating entities. Though it is not possible to quanlify the benefits resulting from cach componient, a dlescription of the expected benefits from the project for each beneficiary are listed in the Attachment below. Costs Given in Attachment below. Net Present Value Since the benefits from the project are not quantifiable, NPV is not applicable. Internal Rate of Return Not applicable. Overall Risk Low Main Beneficiaries: The support provided to various NBFI under tlhis project has been designed to benefit the following groups of stakeholders: individual investors, small investors, issuers of securities, professionals working in the non-bank financial sectors, homeowners, savers in the rural and informal sectors, and foreign investors. e o P-. X m XO(D 1.s  THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT Attachment: Objectives and Expected Benefits of the Project's Components Beneficiary Objectives Costs Expected Benefits US$ mn. Ghana Stock Exchange Building institutional capacity to improve operational efficiency 3.125 Improved operational efficiency of GSE-- through the establishment of: (i) a clearing and settlement system; number of failed transactions are projected to be (ii) a Management Information System (MIS); and (iii) links with reduced by 30 percent. other stock exchanges. Doubled training capacity. Building local capacity by strengthening GSE's training program. Five fold increase in the number of security Developing new markets and products through support for expanded holders. distribution of securities in urban and rural areas. Securities Regulatory Strengthening regulatory and supervisory capacity of SRC by 1.25 A well supervised securities industry in Ghana Commission improving its organizational structure. would improve the confidence and increase the Building institutional capacity by establishing an MIS. number of savers and investors, thereby Building local capacity through training of staff. improving financial intermediation in the economy. Bank of Ghana, NBFI Strengthening regulatory and supervisory capacity by improving its 0.925 A well supervised non-bank financial sector in Department organizational structure. Ghana would improve the confidence and Building institutional capacity by establishing an MIS. increase the number of savers and investors, Building local capacity through training of staff. thereby improving financial intermediation in the economy. Bank of Ghana for Improving financial infrastructure through the payments system and 4.05 Cash/M2 falling to 20 percent. Payment Systems postal giro studies. Integrated Negotiable Instruments Act and EFT Legislative reform. Law passed and enforced. Institution building through: (i) establishment of financial data Operational capacity of 10,000 high value communications infrastructure; (ii) Real Time Gross Settlement for transactions per day on real-time basis and High Value Funds Transfer; (iii) networked Automated Teller 500,000 checks per day at the clearing house; Machine (ATM) capability; and (iv) computerization and automation local checks cleared D+l and outstation D+3. of clearing houses. Building local capacity through workshops and overseas training. o w 41h  Beneficiary Objectives Costs Expected Benefits US$ mn. National Insurance Revising insurance legislation. 1.275 A well regulated and supervised insurance Commission Strengthening regulatory and supervisory capacity by improving the industry would improve industry performance organizational structure. and provide better safeguards to the customers Building institutional capacity by establishing an MIS. of the industry, thereby leading to reductions in Building local capacity through training of staff. the cost of insurance coverage. Ghana Reinsurance Preparing GRO for divestiture. 1.05 Creation of a level playing field and a Organization Building institutional capacity by establishing an MIS. competitive and efficient industry structure. Building local capacity through local training and twinning arrangements. Developing new markets and products. State Insurance Restructuring of SIC through design and implementation of an 2.625 Creation of a level playing field and a Corporation organizational restructuring plan. competitive and efficient industry structure. Building institutional capacity by establishing an MIS. Building local capacity through technical, managerial and product development training of SIC staff. Developing new markets and products in both life and non-life businesses. Social Security and Building local capacity through overseas training. 1.25 Pension fund coverage for working population National Insurance Developing new markets and products through expansion of social in the informnal sector. Better returns and safer Trust security to informal sector. portfolio of investments. Home Finance Institution building support through procurement of computers for 1.0 Fifty percent increase in volume of mortgages Company HFC and first-tier mortgage financing institutions. originating from HFC and introduction of new Building local capacity through twinning arrangements. products. e uz CL U.) o D  Beneficiary Objectives Costs Expected Benefits US$ mn. Insurance Industry Converting SIC Training Center into a training facility for the entire 0.58 The industry would be more responsive to the Training Center insurance industry. needs of the customers. School of Expanding and improving executive development programs. 0.675 Improvements in skills base of professionals in Administration at U of non-bank financial sector. Ghana and Institute of Chartered Accountants, Ghana Ministry of Finance Diagnostic review to examine expansion of financial services, both 4.85 Geographical expansion and improved savings and credit, to informal and rural sectors. availability of financial services. Creating a Privatization Trust to foster public placement of enterprises Assistance to the successful implementation of to be divested under the divestiture program. the divestiture program. Assistance to MDPI Ie' MI C O0 r  THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT Financial Summary 1996 1997 1998 1999 Implementation Period Project Costs (US$ '000) Investment Costs 5,850 10,730 6,455 1,865 Recurrent Costs Not quantifiable (see Note below) Total 5,850 10,730 6,455 1,865 Financing Sources (Percentages) IDA 96.00 97.90 96.50 87.80 Government 2.00 1.10 1.70 6.10 Beneficiaries 2.00 1.00 1.80 6.10 i Total 100.00 100.00 100.00 100.00 Note: There are no recurrent costs associated with the legislative reform, divestiture, organization structuring, and local capacity building components. For the remaining ones, i.e., the institution building, regulatory reform, and market and product development components, recurrent costs would be estimated during the initial phase of implementation, i.e., the planning/design phase for the component. In the case of regulatory bodies or associations such as NIC, SRC, ICAG, the Payments Council and GSE, the recurrent costs would be borne by the industry. For MOF, BOG and the University of Ghana, these costs would be borne by the Government. Profit making beneficiaries, such as, SIC, GRO, SSNIT and HFC would bear their own recurrent costs. kd ) oq m  THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT Key Performance Indicators* Beneficiary Current Mid-Project End of Project Ghana Stock Exchange 1. Clearing and settlement of Fourteen days settlement period Implementation of clearing and Five days or less settlement period securities on average; over 40 percent settlement system; reduction of on average; further reduction of transactions settled over fourteen failed transactions (over fourteen failed transactions to 5 percent or days. days) to 10 percent. less. 2. Equity placement Eighteen listings on GSE; Thirty listings on GSE; 40 percent Forty+ listings on GSE; 100 percent capitalization US$2 billion increase in capitalization. increase in capitalization (from equivalent; no links with other baseline); stock exchanges. established links with 1-2 stock exchanges. 3. GSE training program Low training capacity; fewer Double capacity and number of number of hours of training hours of training provided. provided. 4. Distribution of securities Less than 5000 individual holders Dissemination of information to Wide network for distribution of of securities. rural areas; 10,000 individual securities; more than 25,000 security holders. individual security holders. Securities Regulatory Commission Organizational structure; regulation No formal organization structure, SRC established with adequate Operational SRC with fully trained and supervision regulations and procedures for staff and a training plan; an staff, established ongoing supervising the securities organizational plan; draft on regulations and supervision industry. regulations and procedures; procedures for each kind of computers procured. institution in the securities industry. 00d n ' This section draws on Gary Perlin's Memorandum "Financial Sector Performance Indicators" dated June 6, 1995. 41 .  Beneficiary Current Mid-Project End of Project Bank of Ghana NBFI Department Organizational structure; licensing, No formal organization structure, Adequate staff and training plan; Operational NBFI Department with regulation and supervision of nine regulations and licensing an organizational plan; draft on fully trained staff; established categories of non-bank financial procedures for supervising the regulations and licensing ongoing regulations, licensing and institutions non-bank financial institutions. procedures; computers procured. supervision procedures for each kind of institution in the non-bank financial sector. National Insurance Commission Organizational structure; licensing, No formal organization structure, Adequate staff and training plan; Operational NIC with fully trained regulation and supervision of poor regulations and licensing an organizational plan; draft on staff; established ongoing insurance industry procedures for supervising the regulations and licensing regulations, licensing and insurance industry. procedures; computers procured. supervision procedures for the insurance industry. State Insurance Corporation 1. Organizational restructuring and Monopoly on all state-owned Removal of monopoly; Sale to private investors. divestiture businesses; low profits; organization restructuring with overstaffing; manual systems. processes and staff rationalization; operational MIS. 2. Market and product development Limited products (both life and New products (life and non-life) for non-life). entire insurance industry. Ghana Reinsurance Organization 1. Divestiture Monopoly on reinsurance Removal of monopoly; operational Sale of GRO to private investor. business; manual systems. MIS. 2. Market and product development Lack of diversified markets and New products introduced and new products. markets tapped.. O F 0t  Beneficiary Current Mid-Project End of Project Ministry of Finance Inadequate availability of Completed design of pilot project Established pilot scheme targeting financial services to the informal for improving financial services small savers and borrowers in urban and rural sector. for small savers and borrowers. and rural areas. Home Finance Company Low volume of mortgages 25 percent increase in volume of 50 percent increase in volume of originated by primary lenders. mortgages originated. mortgages originated. SSNIT No social security coverage for Completed design of scheme for 5 percent of working population in informal sector. expanding the network. the informal sector covered. Payment Systems 1. Optimum legal infrastructure and Negotiable Instruments Act and Laws drafted and approved. Laws passed and enforced. financial transactions EFT Law do not exist. 2. High value funds transfer and Three-to-four days for local Hardware installed; software Operational capacity of ten M efficiency in clearing checks clearing and five-to-twenty one customized; and standards for thousand high value transactions per days for outstation clearing of MICR checks approved. day on real-time basis and five checks. hundred thousand checks per day at the clearing house; local checks cleared D+1 and outstation D+3. 3. Cash dominance of the economy CashfM2 38 percent. Completed study on cash Cash/M2 dropped to 20 percent. distribution. e u. 00 00I-. (D tD P~-  - 22 - Schedule C Page I of 2 THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT Procurement and Disbursement A. Summary of Proposed Procurement Arrangements (US$ million) a Procurement Method Total Project Element ICB NCB Other Costsb I Goods 1.1 Computers and office equipment 7.88 2.22 1.02 11.12 (7.58) (2.17) (0.87) (10.62) 2. Consultancies 2.1 Technical Assistance: Advisory Services and Studies 8.61 8.61 (8.18) (8.18) 2.2 Training 5.07 5.07 (5.00) (5.00) 3. Operating costs 0.1 0.1 (0.1) (0.1) TOTAL 7.88 2.22 14.80 24.90 (7.58 CZ "17! (14.15 (23 .90 a Figures in parentheses are the respective amounts financed by IDA Credit. b Cost figures are net of taxes and duties, and include price contingencies.  - 23 - Schedule C Page 2 of 2 THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT B. Disbursement Arrangements Disbursement Amount Category (US$ million) Expenditures to be financed 1. Equipment for: a. Revenue generating 2.30 100 percent of foreign and 90 percent beneficiaries of local expenditures b. Non-revenue 6.33 100 percent of foreign and 90 percent generating of local expenditures beneficiaries 2. Consulting Services, 8.33 100 percent of all expenditures training and studies for all beneficiaries 3. Ministry of Finance a. Equipment and 1.00 100 percent of foreign and 90 percent vehicles of local expenditures b. Consulting Services, 3.75 100 percent of all expenditures training and studies c. Operating costs 0.10 65 percent of all expenditures 3. Unallocated 2.09 TOIAL 23 90 Estimated Disbursements Bank FY 1996 1997 1998 1999 --------------------------- (US$ million)---------------------- Annual 5.30 10.53 6.36 1.71 Cumulative 5.30 15.83 22.19 23.90  - 24 - Schedule D Page 1 of 1 THE REPUBLIC OF GHANA NON-BANK FINANCIAL INSTITUTIONS ASSISTANCE PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare the project: 13 months (b) Prepared by: Government with IDA assistance' (c) First IDA mission: October 1994 (d) Appraisal mission departure: June 1995 (e) Negotiations: October 1995 (f) Planned date of effectiveness: April 1996 (g) List of relevant ICRs and PPARs: Credit No. Project ICR Date Credit 191 1-GH FINSAC I March 29, 1995 This report is based on the findings of the identification, preparation, pre-appraisal and appraisal missions to Ghana led by Anil Chandramnani in 1994 and 1995. Participants in the missions and key contributors to the report include: Claude Sorel (AFTPS) on Capital Markets, Dan Mozes (FSD), Don Mclssac (FSD) on Insurance, Sunil Datt (FSD) on Payment Systems, and Hemant Baijal (AF4TF). Dimitri Vittas (FSD) and David Pugh (IFC) were the peer reviewers. Sibarata Das (AF4CO) provided assistance on the Economic Analysis section.  - 25 - Schedule E Page I of 3 THE STATUS OF BANK GROUP OPERATIONS IN GHANA STATEMENT OF IBRD LOANS AND IDA CREDITS (As of September 30, 1995) Amount in USS Million (less cancellation) Loan or Credit Fiscal Number Year Borrower Purpose Bank IDA Undisbursed 9 loans and 58 credits closed 186.22 1374.84 Of which SALs and Program Loansa Cr. 1393 83 Ghana Recon. Imports 40.00 0.00 F-0090 84 Ghana Export Rehab. 35.89 0.00 Cr. 1435 84 Ghana Export Rehab. 40.10 0.00 Cr. 1573 85 Ghana Recons. Import 60.00 0.00 A-0030 86 Ghana Recons. Import 26.97 0.00 Cr. 1672 86 Ghana Industrial Sector Adjust. 28.50 0.00 A-0130 86 Ghana Industrial Sector Adjust. 25.00 0.00 Cr. 1744 87 Ghana Education Sector Adjust. 34.50 0.00 Cr. 1777 87 Ghana SAC 1 34.00 0.00 A-0250 87 Ghana SAC I 81.00 0.00 A-0251 88 Ghana SAC 1 15.00 0.00 Cr. 1911 88 Ghana Financial Sector Adjust. 100.00 0.00 Cr. 1911-1 89 Ghana Financial Sector Adjust. 6.60 0.00 Cr. 2005 89 Ghana SAC 11 120.00 0.00 Cr. 2005-1 90 Ghana SAC 11 5.70 0.00 Cr. 2005-2 91 Ghana SAC 11 8.30 0.00 Cr.2236-0 91 Ghana Private Invest. Promotion 120.00 0.00 Cr.2236-1 92 Ghana Private Invest. Promotion 6.10 0.00 Cr.2236-2 93 Ghana Private Invest. Promotion 6.54 0.00 Cr. 2345-1 94 Ghana Agricultural Sector Adj. 5.74 0.00 Cr. 2140 90 Ghana Education Sector Adjust. If 49.94 0.00 Cr. 23452 95 Ghana Agric. Secal 5.00 0.00 Sub-Total 854.88 0.00 Cr. 1847 88 Ghana Public Enterprise TA 10.50 2.60 Cr. 1854 88 Ghana Cocoa Rehabilitation 40.00 23.59 Cr. 1858 88 Ghana Transport Rehabilitation 1 60.00 4.93 Cr. 1921 88 Ghana Mining Sector Rehab. 40.00 7.01 Cr. 1946 89 Ghana Telecommunications 11 19.00 2.52 Cr. 1976 89 Ghana Forest Res. Management 39.40 13.62 Cr. 1996 89 Ghana Private SME Dev. 30.00 5.60 Cr.2039 89 Ghana Water Sector Rehab. 25.00 12.31 Cr. 2061 90 Ghana Fifth Power (ECG) 40.00 10.31 Cr. 2109 90 Ghana VRA/Sixth Power 20.00 16.35 Cr. 2157 90 Ghana Urban 11 70.00 35.83 Cr. 2180 91 Ghana Agric. Diversification 16.50 13.89 Cr. 2192 91 Ghana Transport Rehabilitation 11 96.00 35.00 Cr. 2193 91 Ghana Health & Population II 27.00 14.34 Cr. 2224 91 Ghana Econ. Management Support 15.00 5.50 Cr. 2247 91 Ghana National Agric. Research 22.00 18.20 Cr. 2318 * 92 Ghana Financial Sector Adjust. ll 100.00 39.46 Cr. 2319 92 Ghana National Feeder Roads 55.00 43.12 Cr. 2345 * 92 Ghana Agricultural Sector Adj. 80.00 21.36 Cr. 2346 92 Ghana Nat. Agric. Exten. 30.40 23.52 Cr. 2349 92 Ghana Literacy & Functional Skills 17.40 9.58 Cr. 2426 93 Ghana Environmental Resource Mgt. 18.10 12.69 Cr. 2428 93 Ghana Tertiary Education 45.00 33.93 Cr. 2441 93 Ghana National Livestock Services 22.45 16.02 Cr.2467 93 Ghana National Electrification 80.00 79.53 Cr.2498 93 Ghana Urban Transport 76.20 78.63 Cr.2502 93 Ghana Enterprise Development 41.00 39.27 Cr.2508 93 Ghana Primary School Devt. 65.10 52.53 Cr.2555 94 Ghana Agricultural Sector Invest. 21.50 20.19 Cr.2568-0 94 Ghana Local Govemment Dev. 38.50 40.06 Cr.2604 94 Ghana Community Water & Sanitation 21.96 22.67 Cr.2665 95 Ghana Private Sector Development 13.00 12.77 Cr.2682 95 Ghana Thermal (P-VII) 175.60 185.39 Cr.2695 95 Ghana EducNVoc.Trng. 9.60 9.86 Cr.2713 95 Ghana Fisheries 9.00 9.26 Cr,2718 * 95 Ghana Priv.SectorAdj. 70.00 70.06 Cr.2743 95 Ghana Mining Sec.Dev. & Env. 12.30 11.80 TOTAL 186.22 2947.35 1053.30 of which has been repaid 144.39 31.93 TOTAL now held by Bank and IDA 41.83 2916.18 Amount sold 0.38 of which repaid 0.38 TOTAL undisbursed 1053.30 a Approved during or after FY80. b Not yet effective. * SAL/SECAL  - 26 - ScheduhleE Page 2 of 3 GHANA STATEMENT OF IFC INVESTMENTS (As of September 30, 1995) Original Gross Commitments Fiscal Amount in USS million Year Borrower Type of Business Loan Equity Total 1985/90/93 Ashanti Goldfields Corp. Mining 102.50 -- 162.50 265.00 1987 Keta Basin Oil Exploration Energy -- 4.50 4.50 1988/90/91/95 Billiton Bogosu Gold Lim. Mining 19.35 1.89 29.00 50.24 1990 Alugan (AEF) Nonferrous metals 0.28 0.00 0.00 0.28 1990/91/93 CAL Merchant Bank Lim. Capital Markets 8.00 0.88 0.00 8.88 1990/92 Ghanaian Australian Goldf. Mining 18.01 3.00 18.50 39.51 1990/93 Wahome Steel Lim. Iron and Steel 5.20 0.00 0.00 5.20 1991 at Dimples Inn Lim. Tourism 0.24 0.00 0.00 0.24 1991 a/ Plastic Laminates (GH) Lim. Industrial Equipmt. 0.60 0.00 0.00 0.60 1991 Appiah Menka Complex Lim. Chemicals and 0.90 0.00 0.00 0.90 Petroch. 1991 Hotel Investments (Ghana) Tourism 4.20 0.00 0.00 4.20 1991 Securities Discount Comp. Capital Markets 0.00 0.23 0.00 0.23 1992 Ghana Aluminium Products Nonferrous metals 0.00 0.44 0.00 0.44 1992 Packrite Cartons and Pack Timber, pulp and 0.60 0.00 0.00 0.60 paper 1993 al Achimota Brewery Comp. General 3.50 1.00 0.0 4.50 manufacturing 1993 Combined Farmers Lim. Food and agribusiness 0.40 0.00 0.00 0.40 1993 Ecobank Ghana Lim. Capital markets 6.00 0.00 0.00 6.00 1993 Polytex Industries Lim. General 0.40 0.00 0.00 0.40 manufacturing 1993 Primewood Products Lim. Timbes, pulp and 1.17 0.00 0.00 1.17 paper 1993/94 Ghana Leasing Co. Lim. Capital Markets 5.00 0.75 0.00 5.75 1994 Afarawaa Farms and Livest Food and 0.36 0.00 0.00 0.36 Agribusiness 1994 Ghana Cement Works Lim. Cement and 3.00 0.00 0.00 3.00 Construct. 1994 Ghana Household Utilities General 0.57 0.00 0.00 0.57 Manufacturing 1994 Palm Royale Apartment Hotel Tourism 1.00 0.00 0.00 1.00 1995 Dupaul Wood Treatment Timber, pulp and 1.00 0.00 0.00 1.00 paper 1995 Shangri-la Hotel Tourism 0.30 0.00 0.00 0.30 Total Gross Commitments b/ 182.58 12.69 210.00 405.27 Less Cancellations, terminations, repayments & 130.47 5.06 179.30 314.83 sales Total Commitments now held c/ 52.11 7.63 30.70 90.44 Total Pending Commitments 8.50 2.56 0.00 11.06 Total Commitments held and pending 60.61 10.19 30.70 101.50 Total Undisbursed 2.17 0.45 0.00 2.62 a/ Investments which have been fully canceled, terminated, written-off, sold, redeemed, or repaid. b/ Gross commitments consist of approved and signed projects. c/ Held commitments consist of disbursed and undisbursed investments.  - 27 - Schedule E Page 3 of 3 Ghana - Implementation Issues Ghana's overall project implementation performance continues to compare favorably with other countries in the Region. The disbursement rate for investment projects in FY95 improved to 17 percent as compared with 13 percent in FY94. The May 1995 CPPR acknowledge improvements in the procurement process in almost all sectors and noted that procurement procedures had been simplified and streamlined. The 1994 CPPR and the 1995 CAS linked future lending levels to disbursement perfornance. Greater attention to implementation by both the Government and the Bank have begun to yield results. Total disbursements for investment operations in FY95 amounted to US$144 million as compared to $112 million in FY94, an increase of 29 percent. The Resident Mission continues to play an increasingly important role in project implementation and to have greater responsibility for project supervision as well as in monitoring procurement and disbursement activities. No new problem projects were recorded. Of the two problem projects from previous years, the Refinery & Distribution Rehabilitation project closed in December 1994. The status of the other problem project is as follows: Water Sector Rehabilitation (FY90). The project has been rated unsatisfactory for FY93, FY94, and FY95. The Action Plan agreed with the government is now progressing reasonably well. The main reason for delayed implementation was poor management of the utility. It is now felt that the project's development objectives (capacity building of the GWSC) could only be met and sustained through a complete restructuring of the sector. The government held a successful workshop in March 1995 which identified future options for the water sector and agreed, in principle, to privatize GWSC under a new project now under preparation.  -28- ANNEX 1 Page 1 of 4 rn a. . , ,tr!. :. MINISTRY OF FINANCE -ad dnl.- Jr :f_ I;rrrlel;cr.d ,d P.O. BOX M 40 OU, R.' N, SEC/FP/036 5 ACCRA Y.., RTd. N,, EPUBLIC OF GHANA (3 October, 1995 T,l V .......... ....................... . 199 .. NON-BANK FINANCIAL SECTOR LETTER OF SECTOR STRATEGY 1. The purpose of this letter is to define the policy that the Government of Ghana (GOG) intends to pursue for the development of the non-bank financial sector in Ghana and to outline strategies for the implementation of these policies. This Letter of Sector Strategy has been prepared in the context of the Non- Bank Financial Institutions (NBFI) Assistance Project currently under preparation in cooperation with the International Development Association (IDA). GOG has for some time been pursuing a policy of liberalization and promotion of private sector initiatives in the economy in general as well as in the non-bank financial sector in particular and it is the intent of this letter to briefly summarize what initiatives GOG proposes to take in this sector in the coming years. Background 2. GOG has implemented two Financial Sector Adjustment Programmes (FINSAP) in cooperation with IDA. The first, FINSAP - I, which is now complete focused on cleaning up the portfolio of state-owned banks and strengthening the regulatory and supervisory capacity of the Bank of Ghana (BOG). The second, FINSAP-II, which is in the final stages of implementation seeks to divest GOG's holdings in the banking sector and to increase competition through regulatory and legislative reforms, privatization and liberalization. Under FINSAP-II, GOG took the first steps for the revitalization of the non-bank financial sector by authorizing detailed independent reviews of the insurance industry and of the Social Security and National Insurance Trust (SSNIT). Sector Obiectives 3. Ghana has achieved significant progress in the last ten years under the broad-based adjustment strategy that it has adopted under the Economic Recovery programme. However it has not achieved much success in increasing the mobilization of domestic and foreign capital, which is key to stimulating private sector-led economic development. The Financial Sector Report prepared by the Bank in consultation with GOG concluded that one factor that has contributed significantly to low savings and investment rates in Ghana is poor financial intermediation in the domestic economy. Having achieved significant progress under the banking sector reform programme, it is now the objective of GOG to focus on the development of a competitive, efficient,  - 29 - ANNEX 1 Page 2 of 4 and well-supervised non-bank financial sector in order to improve the mobilization of domestic savings and investment mechanisms and to attract sustainable foreign private investment flows into the Ghanaian economy. Strategy for Achieving these Objectives 4. The overall objective of developing of a competitive, efficient and well-supervised non-bank financial sector would be achieved through a strategy based on strengthening the institutions, developing the instruments and introducing the incentives necessary to increase the mobilization of domestic capital and facilitate the flow of foreign capital. This involves taking the steps required to: (a) create sound legislative and regulatory frameworks for each sub-sector; (b) develop appropriate organization structures; (c) achieve improvements in operational efficiency; (d) increase competition and support divestiture where necessary; (e) build local capacity; (f) develop new markets and products, and (g) promote institutions and instruments to improve the provision of financial services to the informal and rural sectors. 5. This strategy has several interdependent elements, which are described below: 6. Legislative Reforms. During the last two years, GOG has revised the following laws: Securities Law (1993), Non-Bank Financial Institutions Law (1993), Home Finance Companies Law (1993) and the SSNIT Law (1991). In order to complete the legislative reforms pertaining to the non-bank financial sector in Ghana, MOF now intends to revise the Insurance Law (1984) and the Reinsurance Law and consider the promulgation of a Negotiable Instruments Law and an Electronic Funds Transfer law. The revision of legislation pertaining to the insurance industry would also result in deeper changes in the industry structure by creating a more competitive industry through the removal of exclusive monopolies in favour of State Insurance Corporation (SIC) and Ghana Reinsurance Organization. 7. Regulatory and Supervisory Reforms. While notable progress has been made on the legislative front, greater attention must now be paid to the process of regulatory and supervisory reforms under the Securities Law, the Insurance and Reinsurance Laws (after revision), the NBFI Law. For instance, legislation for the creation of an independent Securities Regulation Commission (SRC) has been passed but regulations and supervision requirements are in the early stages of preparation. Significant institutional strengthening and capacity building is required to enable SRC and the National Insurance Commission (NIC) to become effective regulators. 8. Institution Building and Organization Structuring. Different NBFI in Ghana are at different stages of development, but many of them need institutional reforms.  - 30 - ANNEX 1 Page 3 of 4 In some cases, such as BOG, Ghana Stock Exchange (GSE) and the Home Finance Company (HFC), what is required is to improve efficiency by strengthening existing institutional structures through logistical support, process renewals and capacity building. In the case of the pension funds industry, only a review of investment policy guidelines is required to ensure that the industry continues to develop to international standards. However, in some other cases, such as SIC and Ghana Reinsurance Organization, it is' necessary to go beyond efficiency improvements to more extensive re-engineering of organization structures, processes and products that would be required for these institutions to respond effectively to more dramatic changes envisioned in the industry. In the case of institutions such as SRC and NIC, new organization structures must be created based on principles of efficiency and effectiveness. 9. Building Local Capacity. One of the key concerns sector in Ghana is the creation of the local capacity necessary to sustain the projected growth of the non-bank financial sector. GOG would like to support capacity building at all levels, starting from the graduate and undergraduate levels, followed by opportunities for professional training in various sub-sectors, and support for the infrastructure required for continuous upgrading the skills of professionals working in this sector. For this purpose, GOG gives priority to supporting capacity building institutions such as the University of Ghana, GIMPA, Management and Productivity Development Institute (MDPI), the proposed Insurance Industry Training Center, the training school of the Ghana Stock Exchange, Institute of Chartered Accountants, Ghana (ICAG) etc. The Government supports efforts by training institutions and individual organizations to build capacity through local and overseas training, through twinning arrangements or other methods of transferring and adapting technology to Ghana. 10. Market and Product Development. One important element of the strategy to develop and strengthen the non-bank financial sector is to diversify the product range and the market reach of the sector so that it could respond more effectively to the perceived needs of the Ghanaian people. That, in turn, would improve the viability of NBFI in Ghana. GOG would support initiatives to establish links between GSE and other stock exchanges, to introduce new instruments (such as the Privatization Trust) in support of the accelerated divestiture programme, new products in the insurance industry, a social security scheme for the informal sector, new mortgage finance instruments, the nationwide Payments System as well as initiatives to improve the availability of financial services to the informal and rural sectors.  - 31 - ANNEX 1 Page 4 of 4 Action Programme to Implement the Strategy 11. The Government of Ghana views the above strategy as an integral part of the broader macroeconomic reforms being undertaken in Ghana. GOG proposes to execute this strategy in close coordination with the macroeconomic reform programme by implementing the following actions, among others, over the next several years: (a) GOG proposes- to reduce its share-holding in SIC and Ghana Reinsurance Organization to 40 percent or less by 1998. (b) GOG is committed to the appointment of a widely respected independent Securities Regulation Commissioner and to assisting SRC and NIC in institutional strengthening and capacity building. (c) GOG proposes to support the creation of a sustainable institution and associated instruments to improve access to financial services for the rural and informal sector. (d) GOG would assist BOG in creating a National Payments Council to improve the provision of financial services in all parts of the country and to increase the efficiency of the financial sector as a whole. (e) To assist this implementation process, GOG undertakes to create an Implementation Unit in the Ministry of Finance, chaired by the Deputy Minister of Finance, which would be appropriately staffed with people with experience in private sector NBFI. 12. We trust that this statement of sector strategy is a clear expression of the direction the Government of Ghana wants to move in and is consistent with our objectives and strategies under various programmes already initiated or proposed to be initiated in cooperation with IDA. The Non-Bank Financial Institutions (NBFI) Assistance Project is fully consistent with our long term commitment to promote private sector-led, sustainable economic development in Ghana and we request your assistance in securing its approval at the earliest possible. R. X. mINISTEROFF NANCE MR. PETER WATSON DIVISION CHIEF, TRADE, FINANCE AND INVESTMENTS DIVISION WEST-CENTRAL AFRICA DEPARTMENT INTERNATIONAL DEVELOPMENT ASSOCIATION 1818 H. STREET, NW, WASHINGTON D.C. 20433 U.S.A.  ANNEX 2: NBFI PROJECT DESIGN MATRIX Capital Market Institutions Contractual Savings Institutions Capacity Building and Diagnostic Studies GSE SRC BOG NBFI NIC SIC GRO SSNIT HFC Nati. Dept. MOF/ICAG/ Payments _______ _______ ________ U of Ghana Conc/BOG Legislative Securities Law NBFI Law tei'i5to of Home Finance U eof Ghan Reform 1993 1993 Companies Law Enst-E l.a.- 1993 e d Regulatory NBFI Law, 1993 ReforT .. ...... Organization Sc resource me resource -. .t ..d ... ....ig Structuring ...... . a .ir,m, ...... .tio rgw ...tw... BuilDing ffivestiur _ _ iJflVI5 . g; ::..echnical needs of tructttre of MDP Coit. ...... .of. DIvestituren........... arket...: . . .. ...... ~~~~~~~~~~~,.,. .. ... ... ... ... ., -. .. . r 'toduct pI2 efiunJ Key: Shaded boxes represent components covered by the NBFI Assistance Project :1 NI: needs have been identified by beneficiaries AD: Actions defined for technical assistance TBD: Actions needed are yet to be defined o ........ ...~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ..... ........... ... .... ..9 W&W d ...~~~~~~~~~~~~~ ......... . .... ....... ... ~ ~ ~ ~ ~ ~ ~ ~ ~ I  ANNEX 3: LINKAGES OF NBFI PROJECT WITH OTHER BANK PROJECTS Other Bank Projects NBFI Project Privatization PSAC: Agreement on the schedule for NBFI Project: Support for a new privatization of State Owned Enterprises (SOE) financial instrument, the Privatization under the Divestiture Program (privatization and Trust, and technical advice for liquidation). strengthening the role of GSE in public listing of SOE to be privatized. Support PETA: Broad support for Divestiture for implementation of the divestiture Implementation Committee and State Enterprise plans for SIC and GRO. ____ ___ ___ ____ ___ ___ ___ Commission to implement the PSAC program. _________________ Securities Market PEED: Long Term Debt (LTD) study providing NBFI Project: Institution building, support for development of the LTD securities building local capacity and market market. development for the securities industry including support for implementation of LTD Report. Capacity Building FINSAC II: Training for Institute of Chartered NBFI Project: Continuation of support Accountants of Ghana (Completed) and training provided under FINSAC II for both for National Insurance Commission (under ICAG and NIC. implementation). Payments System FINSAC II: BOG computerization plan NBFI Project: Establishing PEED: SWIFT System for improvements in infrastructure for financial institutions international payments. (including BOG, the banks, GSE), IRS, CEPS and GOG treasury to improve domestic payments system mechansm. PSAC: Private Sector Adjustment Credit PETA: Public Enterprise Technical Assistance Project PEED: Private Enterprise and Export Development Project FINSAC II: Financial Sector Adjustment Credit 0 W Fh  -34- ANNEX 4 Page 1 of 4 ANNEX 4: DETAILED PROJECT DESCRIPTION A detailed description of each component is provided below. 1. Ghana Stock Exchange. GSE is the most important capital market institution. It is still in the early stages of development. It has only 18 listed companies, trading volumes are small and the market is shallow. Retums on the stock exchange which were high between 1992 and 1994, have moderated in 1995 showing that the market is becoming more mature. However, increases in the number of listings, market capitalization and turnover are indicative of the continued interest in tradable assets and securities. While GSE is not fully self-sustaining at this point, focused effort is required to increase the demand for listed securities from investors and to increase the listing of securities by issuers to enable it to achieve self-sufficiency. 2. Support would be provided to GSE for: (a) Institution Building, through establishment of a clearing and settlement system and a share depository system; improvements in operational efficiency through procurement of computers and accessories; and, advice on issue and trading of equity securities and establishing linkages with other stock exchanges in Africa to increase depth and liquidity; (b) Building Local Capacity through strengthening of the existing training program at GSE; and (c) Market and Product Development through support for expanded distribution of securities through education campaigns aimed at increasing awareness and understanding of the role of securities markets, and training for other financial institutions in the distribution of securities. 3. Securities Regulatory Commission. SRC has been legislated to supervise and regulate the securities market, but has not yet been established. Support to SRC would be provided for: regulatory reforms, strengthening of regulatory and supervisory capacity; organization structuring; institutional strengthening including procurement of computers and communication equipment; and capacity building for SRC staff. 4. Bank of Ghana's NBFI Department. Support would be provided to the NBFI Department of BOG for: a comprehensive review of various legislation and regulatory issues concerning NBFI including the framing of prudential regulations for various categories of NBFI; strengthening of regulatory and supervisory capacity; organization structuring; institutional strengthening including procurement of computers and other equipment and building local capacity. 5. National Insurance Commission. Regulation, supervision, and licensing in the insurance industry is the responsibility of the NIC. However, NIC has not been able to provide adequate regulation and supervision for the industry due to shortage of financial resources, office space, and qualified professional staff. With assistance from the industry, NIC has located acceptable premises and hopes to employ additional staff to enhance its operations. Under this Credit, support to NIC will be provided for: revising  - 35 - ANNEX 4 Page 2 of 4 the Insurance Law, 1989, the Reinsurance Law, 1990, and other legislation affecting the insurance industry; strengthening regulatory capacity, creating a framework for regulation and prudential supervision, data collection and evaluation; designing and implementing an organizational structuring plan; institution building through procurement of computers and accessories and creation of a database on market risk profile for use by the insurance industry; and capacity building for NIC staff. 6. The insurance industry in Ghana consists of one large corporation, the SIC, two medium sized private companies, several small companies, and one state-owned reinsurance organization, GRO. SIC dominates the industry (with nearly two-thirds of the total market) on the basis of a monopoly on all GOG and SOE businesses (which accounts for nearly 40 percent of the industry premiums). GRO enjoys a monopoly with an obligatory legal cession of 20 percent on every insurance policy written. 7. State Insurance Corporation. SIC is to be restructured with special emphasis on new product development, more aggressive marketing and quick response to clients prior to divestiture, expected by 1998. Necessary support would be provided to prepare SIC for divestiture after canceling monopolies in its favor and converting it into a limited liability company through the following: design and implementation of organizational restructuring plan; institution building through upgrading technical operations in SIC's underwriting department; building local capacity through technical, managerial and product development training, and development of new products in the life and non-life businesses to respond to the demand for insurance and reinsurance products in the country. In the event SIC is privatized before the expected date, GOG, in consultation with IDA, may reallocate the funds for the local capacity building, market and product development components to one of the other beneficiaries under the project 8. Ghana Reinsurance Organization. Under GOG's divestiture plan, GRO is expected to be divested by 1998 after removing the monopoly in its favor and converting it into a limited liability company. To ensure long term sustainability in a liberalized industry environment, GRO plans to diversify its products and undertake a skills enrichment program. Support to GRO would be provided for institution building through upgrading technical operations; building local capacity through training of GRO staff and twinning arrangements; preparing GRO for divestiture; and developing new markets and instruments. In the event GRO is privatized before the expected date, GOG, in consultation with IDA, may reallocate the funds for the local capacity building, market and product development components to one of the other beneficiaries under the project. 9. Social Security and National Insurance Trust. SSNIT, which is a statutory body governed by the Social Security Law, 1991, has administered the social security plan since it was restructured in 1991. It collects social security contributions and makes payments under three main benefits: (a) old age pension; (b) disability pension; and (c) lumpsum survivors benefit. It operates a partially-funded, defined-benefit scheme to which all establishments (except the armed forces which is exempt and self-employed individuals whose participation is voluntary) are required to contribute a total of 17.5  -36- ANNEX 4 Page 3 of 4 percent of the salary of every employee (5 percent by the employee and 12.5 percent by the employer). SSNIT is managed by a Board of Directors appointed by GOG according to the provisions of the Social Security Law, 1991. SSNIT's net assets, as of December 31, 1994, was Cedi 297 billion and income for the year 1994 was Cedi I I I billion, making it the largest NBFI and the second largest financial institution in the country (after Ghana Commercial Bank). As the single largest investor in Ghana, SSNIT plays a very important role in stimulating the development of the capital markets and in providing long-term finance to the Ghanaian economy. 10. Under this Credit support would be provided to SSNIT for the following: building local capacity through overseas training in investment management and improvement in actuarial skills; and market and product development through provision for SSNIT to exchange experiences and know-how through a twinning arrangement or through the use of consultants experienced in the design and operation of social security and pension fund schemes for workers in the small and informal sectors. 11. Associated Infrastructure and Capacity Building. One of the key objectives of the project is the creation of local capacity to enable the non-bank financial sector in Ghana to develop the skills-base required to sustain its projected growth. Capacity building is necessary at three different levels. Firstly, the foundation of skills development is at the undergraduate and graduate levels, where greater exposure must be provided to concepts relating to the non-bank financial sector. Secondly, there should be opportunities to build on the above foundation with formal, professional training in various sub-sectors of the non-bank financial sector, for instance, similar to the activities of the Institute of Bankers in Ghana in the banking sector. Thirdly, there is need for skills upgradation for professionals already working in the non-bank financial sector. 12. To support capacity building at these three levels, the project would provide technical assistance and institutional support for: (a) GSE's in-house training facility in the form of training material and equipment; (b) SIC's training center for its strengthening as a center for the entire insurance industry; (c) HFC for the capacity building and institutional strengthening through twinning arrangements; (d) School of Administration at the University of Ghana in the form of equipment, training material, and trainers for financial sector issues; (e) institution building support for ICAG; and (f) a diagnostic review by MOF to design a sustainable structure for the Management Development and Productivity Institute (MDPI). 13. Payments Systems. The Ghanaian payments system is highly cash dominant. During lfie past 5 years the C/M2 ratio has risen from 28 percent to 38 percent. Currency in circulation has grown 4 times in the past 4 years. The impact of this cash dominance is that it prevents rapid financial deepening, proves costly to the economy, makes monetary management less effective, impedes tax compliance, and proves risky and highly inconvenient to the public at large. To modernize the domestic payments system and leverage it for greater efficiency and competitiveness in the financial sector, support will be provided to the proposed National Payments Council, led by BOG and comprising  37 ANNEX 4 Page 4 of 4 major payments services providers for establishing a financial data communications network, a real-time gross settlement system for high-value funds transfer. computerization of clearing houses and capacity building by way of training. Support will also be provided to BOG for a preparatory study of the payments system and postal giro system studies and a review of related legislative and regulatory issues. The payments system study would examine, among other things, proposals for cost-effective optimization of the availability of cash and security for users keeping in mind the very high usage of cash in Ghana. 14. MOF. The project would provide technical assistance to MOF for product and market development in the following three areas. First, it would support the creation of a Privatization Trust (PT) to assist the accelerated divestiture program. Second, it would support a detailed review of the issues related to the provision of financial services. both savings and credit to the informal, small-scale and rural sectors. The methodology of this review would be: (a) to collate and recap the substantial amount of literature that is already available on this subject in Ghana and at the Bank; (b) to assess the needs of target groups and institutions for access to savings and credit some of which have been identified below; (c) to analyze some of the internationally acclaimed success stories of institutions (such as BKK in Indonesia, Grameen Bank in Bangladesh and other examples from Thailand, India, Brazil and Latin America) which have demonstrated the ability to reach significant numbers of people who traditionally hadve the least access to financial services, i.e., savings and credit; and (d) to use the above reviews to investigate the feasibility of adapting one of these successful institutions to the Ghanaian environment on a pilot basis. This Credit would provide technical assistance for the diagnostic review and for the design of the pilot program. It would also provide technical assistance for the follow-on pilot initiative based on the design recommended by the diagnostic studies. This component would be coordinated on a day-to-day basis by an advisor to be appointed at MOF for two years under the guidance of the Financial Sector Oversight Committee in Ghana. The Bank's Consultative Group to Assist the Poorest would also participate in this component by providing technical support for the diagnostic review and the follow-on pilot program. Third, the project would also provide support to MOF. the implementing agency for the project. to establish a PCT to monitor and coordinate project implementation.  -38- ANNEX 5 Page 1 of 3 ANNEX 5. ECONOMIC ANALYSIS: IMPLICATIONS FOR GROWTH I. Formal financial savings in Ghana account for less than one fourth of total savings, and much of the remainder is stored in real assets or in informal financial institutions. There is only little evidence of mutual cooperation between the formal and informal financial sectors, suggesting that the financial system has not yet reached the state where marginal rates of return on investments are equalized across the entire financial system. Nor is there evidence of an active curb market that could substitute for the formal financial system and provide efficient financing. The intermediation function in the informal sector appears to be limited, which tums savers into involuntary investors while potential investors are starved for funds. This analysis suggests that private investments financed through the formal sector have, on average, a higher rate of return than those financed through the informal sector. 2. Under these circumstances, the formal financial sector could gain substantially by increasing domestic resource mobilization by encouraging the expansion of the deposit base and increased lending. This report, however, has identified a number of obstacles (such as the dominance of state-owned enterprises, which limits competition, and the people's lack of confidence in the fomial financial system) in the path of market growth. 3. It is assumed here that actions can be taken to improve domestic resource mobilization enhancing financial intermediation and that financial intermnediation will help divert savings from lower-return investments in the informal sector into higher-return private investments in the formal sector. In addition, the projected drop in the fiscal deficit, and with it, the decline in govenmment borrowing requirements, makes this plausible. Until the financial system reaches a market-clearing equilibrium, however, the projected increases in the rate of growth may only be transitory. However, while it is not clear that enhanced financial intermediation necessarily increases the long-run rate of growth of the economy, such an impact seems likely. Implications for Growth 4. In this section, it is assumed that only one fourth of Ghana's total savings enter the formal financial system. It is further assumed that the real rate of return on savings intermediated through the financial system is 4 percent. Savings outside the system earn a real rate of return of either 4 percent or 0 percent, for a simple average of 2 percent. With these relative rates and proportions, the average real rate of return economy-wide would be 2.5 percent. Assuming the marginal rate of return on capital does not change, if some savings held outside the formal financial system are brought inside, the average return will rise to the extent that the composition of new investments is shifted toward higher-return projects.2 (For the purposes of this analysis it is assumed that the increase in savings channeled through the formal Ghana Financial Sector Report (GH- -13423, dated December 29, 1994), Chapter 9 2 Assuming that the marginal rate of return on investments financed through the formal financial system would decline as more savings are channeled through the financial system, more nonfinancial savings would need to be brought into the financial system to achieve the same level of economic growth rates.  39 ANNEX 5 Page 2 of 3 system would occur over a five-year period, beginning in 1996. Over that absorption period. growth rates would be boosted and then return to normal levels for the long tern.) 5. Table 1 offers three possible scenarios should financial intermediation be increased. Assessing what share of existing nonfinancial savings needs to come into the formal financial system to raise cumulative economic growth rates for five years, it shows that absorption of 16 percent of outside savings would increase the economy's real rate of growth by one percentage point over five years, while absorption of 33 percent of outside savings would increase the growth rate by two percentage points. Implications for the Financial Sector 6. Table I also provides a starting point for analyzing the impact of increased intennediation on the financial sector. As shown, a posited absorption of 16 percent of outside 3 savings would entail a 50 percent rise in the inflow of savings into the financial system. Table 1. Impact of Enhanced Financial Intermediation - Three Scenarios (Percentage) Share of existing nonfinancial Increase in savings brought growth rate Improvement in Increase in into the financial of financial efficiency of economic Scenario system savings investment growth rates 1 16 50 10 1.0 2 33 100 20 2.0 3 42 150 25 2.5 Source: World Bank staff estimates. 7. The implications of greater intermediation for the financial depth of the system can be seen in an analysis of M2 as a share of GDP (Table 2). Assuming that any increase in financial savings would go into banks as time or savings deposits, the proportion of M2 to GDP would increase. The projections assume a reduction in Ghana's fiscal deficit which would result in a 50 percent increase in financial savings over the five-year period. Based on this estimate, the M2/GDP ratio would be around 30 percent in 2000. Table 2. Impact of Increased Mediation on M2/GDP, 1995-2000 (Percentage) Financial savings 1995 1996 1997 1998 1999 2000 Little change (base run) 17.3 16.8 16.8 17.8 19.7 22.4 50 percent increase by 2000 17.3 17.1 17.8 19.6 22.8 27.5 (relative to base run) Source: World Bank staff estimates. 3 This projection is based on the assumption that one fourth of actual savings are kept "inside" the financial system. and three fourths "outside."  -40- ANNEX 5 Page 3 of 3 8. Building further on these projections. growing financial savings and a shrinking goverrnent deficit should increase the volume of credit available for private investment (Table 3). The analysis suggests that this growth in private sector credit could be as much as 16 percent a year for the next five years in real terms, simply from the decline in the fiscal deficit. Should financial savings also be increased by 50 percent, the annual growth rate of private sector credit could amount to 20 percent. Such increases would promote substantial private sector growth. Table 3. Implied Impact of Deficit Reduction on Private Sector Credit GDP share of Compound Credita to private sector annual private sectorb credit growth rateC Financial savings (cedi billion) (percentage) (percentage) No change 885.8 6.8 15.9 50 percent increase by 2000 1,053.2 8.1 20.4 a Credit to private sector is estimated by deducting cash holdings and BOG Reserves Bill holdings from total deposits. b Current prices. c Real terms. Source: World Bank staff estimates.  MAP SECTION   IBRD 23606 2 I S BURKINA FASO macemL,~ o 6~~~ao .1 ~~Ch1( B`----OLGATANGAI S I ,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I S~Ib