Ghana - First Financial Sector Adjustment Credit

Document of The World Bank FOR OFFICAL USE ONLY Report No. 14158 PROJECT COMPLETION REPORT REPUBLIC OF GHANA FINANCIAL SECTOR ADJUSTMENT CREDIT I (CREDIT 1911-GH) MARCH 29, 1995 Industry and Energy Operations Division Central-Western Africa Department Africa Regional Office 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 EQUIVALENT (As of May 10, 1994) Currency Unit = Cedis US$1 = C920.75 el = US$0.67 ABBREVIATIONS ADB Agricultural Development Bank BBG Barclays Bank (Ghana) BCC Bank for Credit and Commerce BHC Bank for Housing and Construction COOP Cooperative Bank CDH Consolidated Discount House ERP Economic Recovery Program FINSAC I Financial Sector Adjustment Credit I FINSAC II Financial Sector Adjustment Credit II GCB Ghana Commercial Bank GDP Gross Domestic Product GSE Ghana Stock Exchange ICAG Institute of Chartered Accountants of Ghana IFC International Finance Corporation MB Merchant Bank M2 Broad Money NIB National Investment Bank NPART Non-Performing Assets Recovery Trust NSCB National Savings and Credit Bank ODA Overseas Development Authority PCR Project Completion Report PEED Private Enterprise and Export Development SCB Standard Chartered Bank SSB Social Security Bank FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation March 29, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT Subject: Project Completion Report on Ghana Financial Sector Adiustment Credit I (Credit 1911-GH) Attached is the Project Completion Report for the Ghana Financial Sector Adjustment Credit I (Credit 191 1-GH) prepared by the Africa Regional Office, with Part II of the report contributed by the Borrower. The main objective of the project was to support the first phase of a financial sector adjustment program aimed at: liberalizing the banking environment so as to improve the efficiency of resource mobilization and allocation; restructuring distressed banks; strengthening the banking regulatory and supervisory framework; and developing financial and capital markets. The overall implementation of the project progressed well. The liberalization of the financial environment has now been largely completed with the removal of interest rate ceilings and sectoral credit targets. A new regulatory framework has been introduced by an amended Banking Law and the banking supervision function has been adequately strengthened. A banking restructuring program has also been initiated and the development of money and capital markets has had a modest start. The reforms in Ghana's financial sector have resulted in the restoration of financial soundness in the banking system and have contributed to an increase in the range of available banking services as a result of the entry of new merchant banks. However, there has been little impact on financial deepening and banking competition remains stifled by the slow pace of privatization of the state-owned banks. The Bank's follow-on project-Financial Sector Adjustment Credit II, approved in FY92-supports the divestiture of some of these banks. The project outcome is rated as satisfactory. Institutional development is rated as substantial and sustainability as likely. The PCR is of good quality. It provides a good assessment of the project's implementation experience and results. A combined audit of this project and the follow-on operation is planned. Francisco acasa Acting Director- eneral Attachment 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.  I  FOR OFFICIAL USE ONLY REPUBLIC OF GHANA FINANCIAL SECTOR ADJUSTMENT CREDIT I CREDIT 1911-GH Contents Page Preface ................................................... i Evaluation Sumary .............. i I. Project Review From the Bank's Perspective .. 1 1. Project Identity .................................... 1 2. Background ..1.................... a. The Economy ................................ 1 b. The Financial Sector ............................ 1 3. Project Objectives, Design, Preparation and Execution .... ........ 3 a. Objectives. 3 b. Design and Phasing of Reforms. 3 c. Project Preparation. 4 4. Implementation Performance .. 5 a. Liberalization of Financial and Banking Environment. 5 b. The Legal and Regulatory Framework. 5 c. Bank Supervision by Bank of Ghana. 6 d. The Restructuring of Distressed Banks. 6 e. Recovery of Non-Performing Assets. 8 f. Development of Money and Capital Markets .... ......... 8 g. Corporate Restructuring .......................... 9 h. Strengthening the Accounting and Auditing Profession ... ... 10 i. Training of Bankers ........................... 10 5. Project Results and Sustainability ........................ 11 a. Results Regarding Specific Program Component .... ..... 11 b. Impact on Financial Sector Overall .................. 13 c. Sustainability ................................ 15 6. IDA Performance .................................. 16 7. Borrower's Performance .............................. 16 8. Lessons Learned .................................. 17 II. Project Review From Borrower's Perspective ....... .. ........... 19 1. Background ................................. 19 2. Project Description and Implementation ....... ............. 20 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. l  Page 3. Loan Disbursement .................. 20 4. Lessons Learned .................. 21 HI. Staistical Ifformation ............ ............ 22 1. Related Bank Loans & Credits .......................... 22 2. Credit Data ...................................... 22 3. Credit Processing Timetable ........................... 23 4. Mission Data ..................................... 23 ANNEXES A Policy Matrix ......................................... 24 B Financial Statements of Seven Restructured Banks .................... 30 C Loan Portfolio Classification of Restructured Banks ................... 32 D Aggregate Balance Sheets of All Banks ........................... 33 E Aggregate Income Statements of All Banks ......................... 34 F Selected Data on Financial Intermediation .......................... 35  i REPUBLIC OF GHANA FINANCIAL SECTOR ADJUSTMENT CREDIT I (Credit 1911-GH) PREFACE This is the Project Completion Report (PCR) for the first Financial Sector Adjustment Credit I (FINSAC I) to Ghana for an original amount equivalent to US$100 million approved on May 31, 1988. This amount was subsequently increased to US$106.6 million equivalent through a supplementary IDA Credit. The Credit was signed on June 14 and declared effective on August 11, 1988. The original closing date of September 30, 1990 was subsequently extended to December 31, 1992 to allow the Government additional time to complete disbursements for the technical assistance components. The Credit was followed by a second Financial Sector Adjustment Credit (FINSAC II) for US$100 million equivalent approved by IDA on December 19, 1991. The PCR was prepared by the Industry and Energy Division (AF4IE) of the (then) Western Africa Department (Evaluation Summary, Parts I and III) and the Borrower (Part II). Preparation of this PCR was based on the Report and Recommendations of the President, the Development Credit Agreement, Supervision Reports, correspondence between IDA and the Borrower and internal Bank documents.   iii REPUBLIC OF GHANA FINANCIAL SECTOR ADJUSTMENT CREDIT I CREDIT 1911-GH EVALUATION SUMMARY Background 1. To arrest the protracted economic decline which started in the 1970s, a new Government in Ghana adopted, in 1983, an Economic Recovery Program (ERP) containing several bold reforms. It devalued the currency, eliminated subsidies, deregulated most price and distribution controls and introduced some necessary fiscal and budgetary measures. The economy's response to the ERP has since been very positive, with economic growth averaging about 5% per year over the period 1984-93. IDA has supported these reforms with three Structural Adjustment Credits (SACs) approved, respectively, in 1988, 1989 and 1991. The Financial Sector 2. IDA's work on the Ghanaian financial sector started in 1985, at a time when the latter was in severe distress. This situation represented a serious constraint to growth in the real sectors of the economy which had begun to show promising signs of recovery under the ERP. A major financial sector review was carried out in 1987, which identified a large number of sector deficiencies. These included an insolvent banking system dominated by State-owned banks and saddled with huge non-performing loans and excessive intermediation costs; a low level of financial intermediation reflecting a poor record in domestic resources mobilization; inefficient credit allocation partly on account of Central Bank-directed interest rates and sectoral credit targets; the virtual absence of a money market and capital market, and the weakness of the supervision of the banking system by BOG and the overall inadequacies of the regulatory framework. The above mentioned diagnosis formed the basis for the formulation and adoption of a comprehensive Action Program containing measures aimed at restructuring distressed banks, strengthening the regulatory and supervisory framework, developing financial and capital markets, and more generally, liberalizing the financial sector environment so as to improve the efficiency of resource mobilization and credit allocation. That initial Action Program was supported by the Financial Sector Adjustment Credit (FINSAC I) approved in 1988, and was followed by an enhanced reform program supported by the subsequent FINSAC II approved in 1991. 3. The formal financial system which has grown and diversified in recent years is comprised of the Central Bank, the Bank of Ghana (BOG), six commercial banks, three specialized banks, three merchant banks, a cooperative bank and over 100 rural banks. The six commercial banks, including Ghana Commercial Bank (GCB), Standard Chartered Bank of Ghana (SCB), Barclays Bank of Ghana (Barclays), Social Security Bank (SSB), National Saving and Credit Bank (NSCB) and the recently established Meridien-BIAO of Ghana, have over 80% of the total assets and deposits in the system. GCB continues to dominate the system with over 50% of the assets and deposits of the banking system, but its market share of net loans has declined to about one-third and is expected to decline further with growing competition and the entry of new banks in the market. The three former development finance institutions, Agricultural Development Bank (ADB), National Investment Bank (NIB) and Bank for Housing and Construction (BHC) have introduced commercial banking services. Pending the forthcoming banking divestiture program, most banks are either partly or wholly owned by the Government, although the latter's shareholding in some major banks (e.g., SCB, Barclays) is small and the management of these banks rests entirely with its private shareholders. Two private merchant banks, Ecobank Ghana Ltd. and Continental  iv Acceptances, were established in 1990. These institutions and the previously existing Merchant Bank, take corporate deposits, finance trade and industry, provide advisory services and manage money and capital market activities such as underwriting, trading on the Stock Exchange, privatization, mergers and acquisitions and debenture issues. There are a number of significant non-bank institutions in Ghana that are not regulated by the Banking Act, but came under the jurisdiction of a separate Non-Bank Financial Institutions Act promulgated recently in 1993. The capital market is in its embryonic stage. A newly formed Stock Exchange commenced trading in November 1990. Processing of Credit 4. The preparation of FINSAC I was preceded by intensive economic and financial sector work. A first financial sector mission, in 1985, identified fundamental problems and recommended a wide-ranging program of reforms, embodied in an Action Program agreed with the Government and subsequently incorporated in the Policy Matrix under FINSAC I. The Initiating Memorandum was approved by the Operations Committee on December 10, 1987, followed immediately, in late February, by appraisal. The Credit was negotiated in April, approved by the Board on May 31 and declared effective on August 11, 1988. The original amount of US$100 million equivalent was subsequently increased to US$106.6 million through a Supplementary IDA Credit. The adjustment program was cofinanced by a loan in Japanese yen equivalent to US$93.9 million from the Overseas Economic Cooperation Fund, and a grant in Swiss Francs equivalent to US$11.8 million by the Government of the Swiss Confederation. The second tranche (US$30 million) was released in June 1990, and the third tranche (US$20 million) in December 1990. The original closing date of September 30, 1990 was subsequently extended to December 31, 1992, to allow additional time for disbursements of the technical assistance component. That significant delay was attributable to the initial over-optimistic estimate of implementation pace, and to the Government's deliberate and, therefore, time-consuming approach to implementing complex reforms, such as bank restructuring. Design and Objectives of Program 5. The financial sector adjustment program supported by FINSAC I was designed to deal selectively, and in priority, with the more fundamental and urgent problems confronting the Ghanaian financial sector back in 1988. These included: (a) the potential collapse of some major banks which were technically insolvent; (b) the lack of confidence in the banking system on the part of the public; (c) the absence of an appropriate regulatory and prudential framework for banking activities; and (d) the weakness of banking supervision by Bank of Ghana, the central bank. Consequently, the main objectives of the Credit were to: (i) liberalize the environment for banking operations through the removal of interest rate controls and sectoral credit targets;  v (ii) enhance the soundness of banking institutions by putting in place a new legal, regulatory and prudential framework; (iii) strengthen the banking supervision function of BOG; (iv) restructure financially distressed banking institutions following the adoption of a suitable framework and the formulation of institution- specific restructuring plans; and (v) attempt to recover to the extent possible, the non-performing assets taken over from distressed banks. In addition, other objectives supported by the Credit included: (vi) initiating the development of the money and capital market (vii) initiating a study on the need and modalities for corporate restructuring; (viii) strengthening the accounting and auditing profession; and (ix) training of bank managers and staff. Implementation Performance 6. Notwithstanding some delay attributable to the complexity of the reform program (para 4 above), implementation of the Credit has been, generally, highly satisfactory. IDA's satisfaction with the results of FINSAC I led it to approve a follow-on operation, FINSAC II, some three years later, in December 1991. As noted below, each of the specific program objectives, as listed in the preceding paragraph 5, by-and-large, has been satisfactorily achieved: (e) The liberalization of the financid and banking envirornent has now been largely completed, with the removal of ceilings on banking interest rates and other charges, and the abolition of all sectoral credit targets. The more liberal environment has probably been a factor encouraging the recent establishment in Ghana of new banks, of a merchant/investment type. This has resulted in a broadening and diversification of the banking system, enhancing the range of banking services available to enterprises. (f) The new legal and regulatory framework for the banking activities introduced by the Amended Banking Law of August 1989 is appropriate. The new legislation provides the banks with a set of prudential regulations to comply with in order to ensure their sound financial operations, and the BOG with the necessary monitoring instruments for exercising its supervisory function over the banks. Furthermore, as of end-1993, all banks operating in Ghana, including the seven State-owned restructured banks (with the exception of the small COOP Bank) are in compliance with major prudential guidelines (e.g., capital adequacy, minimum capital).  vi (g) The banking supervision function of the BOG, previously deficient, has been adequately strengthened. The Banking Supervision Department of BOG has developed its capacity both qualitatively and quantitatively, and by 1993 has been able to comply with the requirement, set out in the 1989 Banking Act, to undertake the inspection of all banks on a yearly basis. BOG's regular and systematic monitoring of the prudential ratios of individual banks has enabled it to ascertain that by 1992 and 1993, all Ghanaian banks, including the seven State-owned banks with the exception of the COOP Bank (slated for merger with a stronger bank) are in compliance with all major prudential regulations, such as capital adequacy, liquidity, minimum capitalization and lending and exposure limits. (h) The bank restructuring program, a key component of FINSAC I, so far, has generally been implemented successfully. Six of the seven State-owned banks are now operating profitably following their restructuring. They have experienced a steady improvement in their operational efficiency (as reflected in operating ratios) and in the condition of their loan portfolios. The only exception is the relatively small Cooperative Bank, which, up to 1993, has not been included in the Government's banking restructuring program. This bank remains insolvent following its recent receivership by Bank of Ghana, and it is in the process of being merged with one of the stronger State-owned banks. The restored sound financial condition and profitability of these six banks is expected to facilitate their forthcoming privatization, in particular, that of the two largest, namely GCB and SSB, which are scheduled for the initial phase of divestiture under the follow-on FINSAC II. The longer-term sustainability of the restructured banks' good performance, however, remains to be seen as it would depend to a large extent on the eventual outcome of their planned privatization. (i) In regard to the recovery of non-performing assets, the performance of NPART (the specially created collection agency) to date has been adequate. As of September 30, 1993, it has effectively collected