Ghana - Non- Bank Financial Institutions Technical Assistance Credit

Report No. PIC1901 Project Name Ghana-Non-Bank Financial Institutions... Technical Assistance Credit Region Africa Sector Finance Project ID GH-PA-943 Borrower Government of Ghana Implementing Agency Ministry of Finance PO Box M.40 Accra, Ghana Date this PID prepared March 26, 1997 Credit Appraisal Date June 1995 Credit Board Date December 5, 1995 Credit Effectiveness Date August 17, 1996 1. Country/Sector Background. 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. 2. 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 and foreign private capital, which are key factors in stimulating private sector-led growth. 3. 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 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 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. 4. 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 sustainable foreign private investment flows into its economy. 5. 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. 6. 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 Credits have dealt with some issues related to informal and rural finance institutions. The next step, which is the focus of this Credit, 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 - 2 -  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. 7. Currently, the non-bank financial sector in Ghana is small, contributing only about 24 percent of the total financial assets in the country, with 11 percent in the government-owned Social Security and National Insurance Trust (SSNIT) and 4 percent on the stock exchange. As a comparison, in South Korea, NBFI accounted for 61 percent of total financial assets in 1992, up from 49 percent in 1987. Though the non-bank financial sector is diverse, apart from SSNIT, the other NBFI are small and do not appear to be developing as expected. The Ghana Stock Exchange (GSE) has only 18 companies listed, but is expected to benefit from the excellent response to the recent privatization of AGC and seven other companies in which GOG has minority interests. There are 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. 8. Credit 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. 9. Credit Description: The Credit 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 Credit 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. -3-  10. Ghana Stock Exchange. Support to GSE is being provided 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. 11. Securities Regulatory Commission. SRC has been legislated to supervise and regulate the securities market, but has not yet been established. Support to SRC is being 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. 12. Bank of Ghana's NBFI Department. Support to the NBFI Department of BOG is being provided 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. 13. National Insurance Commission. Regulation, supervision, and licensing in the insurance industry is the responsibility of the NIC. Under this Credit, support to NIC is being provided for: revising 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. 14. 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 under the Credit is being 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 - 4 -  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 Credit 15. 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 is being 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 Credit. 16. 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. Under this Credit support to SSNIT is being provided 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. 17. Associated Infrastructure and Capacity Building. One of the key objectives of the Credit 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. To support capacity building, the Credit is providing 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). 18. Payments Systems. To modernize the domestic payments system and leverage it for greater efficiency and competitiveness in the financial sector, support is being provided to the newly established National Payments Council, led by BOG and comprising major payments services providers for establishing a financial data communications network, a real-time gross settlement system for - 5 -  high-value funds transfer, computerization of clearing houses and capacity building by way of training. Support is also being 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 examines, 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. 19. MOF. The Credit is providing technical assistance to MOF for product and market development in the following two areas. First, creation of a Privatization Trust (PT) to assist the accelerated divestiture program. Second, a detailed review of microfinance issues, those related to the provision of financial services, both savings and credit to the informal, small-scale and rural sectors. 20. Credit Financing: The Credit cost, including contingencies, is US$24.9 million equivalent. IDA will 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). 21. Credit Implementation: MOF is the implementing agency for this Credit. 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 has appointed a representative to PCT to assist in Credit administration and implementation. While each beneficiary has the primary responsibility for the implementation of its own components, the PCT is responsible for coordinating and monitoring the implementation of the Credit, and for reporting to IDA as defined in the draft Project Implementation Manual. 22. Lessons from Previous Bank/IDA Involvement: The experience with financial sector technical assistance Credits 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 sector specific conditions (e.g., credit controls, fixed interest rates, etc.); (b) the lack of government ownership and beneficiary participation in Credit 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. 23. Learning from the above, this Credit 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 - 6 -  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 Credit as well as under other Credits 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 Credit 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. 24. Poverty Category: Two components of this Credit, the technical assistance for expanding provisions of financial services to informal and rural sectors, and the payments system (postal giro), contribute to the objective of poverty reduction indirectly. The components 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. 25. Environmental Aspects: The Credit is rated a Category C Credit as there are no related environmental issues in the Credit. 26. Program Objective Category: The Credit supports IDA's private sector development and economic management objectives. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 4, 1997. - 7 -