# Central bank of the year: Bank of Ghana

The African central bank has carried out extensive reform of Ghana’s banking sector

At the end of March 2017, Ghana’s newly elected president, Nana Akufo-Addo, nominated Ernest Addison as governor of the Bank of Ghana, after which Addison was rapidly confirmed by the country’s council of state. With a PhD in economics from Canada’s McGill University, Addison was previously the lead regional economist at the African Development Bank. He had accumulated considerable experience, having also served as the director of research at the Bank of Ghana from 2003 to 2011, after a year as the chief economist of the West African Monetary Institute. His appointment led to one of the most notable performances by any central bank over the last decade.

As soon as Addison took over in April 2017, the Bank of Ghana moved to reform the country’s banks. An asset quality review had found that many of Ghana’s lenders were deeply unstable. “In short, the financial system had reached a tipping point, and we could not just have assumed business as usual,” Addison told Central Banking in 2018. The central bank soon closed two lenders, but that was only the start of its activity. Elsie Addo Awadzi, one of the Bank of Ghana’s deputy governors, recently said the review found that many lenders had “passed the stage where you could use supervisory tools to try to make them recover”.

At the start of Addison’s tenure, there were 35 commercial banks operating in Ghana. By January 2019, less than two years into his governorship, there were only 23. Some banks were merged, while others had had their licences withdrawn. The central bank also took radical action in the microfinance sector, shutting down several hundred small lenders. These moves marked a sharp break with previous policy.

In a December 2018 speech, Addison strongly criticised the actions of previous central bank governors: “Our predecessors continued to provide liquidity support to these weak failing banks, without addressing the underlying problems that led to the illiquidity and insolvency of these institutions.” This policy, he made plain, was now over.

The central bank began a reform programme that has lasted several years, and has won praise from institutions such as the International Monetary Fund. The mechanics of this were often difficult. The central bank often found itself having to resolve several banks simultaneously. This greatly increased the demands on its supervisory staff as they worked on creating legally defensible and operationally feasible plans to take over banks.

###### The central bank began a reform programme that has lasted several years, and has won praise from institutions such as the IMF

The central bank announced on several occasions that it had found serious faults in the way the banks were managed. In August 2018, Addison said several of the management teams in Ghana’s banks had obtained banking licences through “false pretences”. Others had removed very large sums of money from the banks they owned, he said. Deputy governor Awadzi said the central bank had to assemble teams of new managers, backed by security experts, who would take over failing banks at very short notice. “For some things, you had to wait until the last minute because you didn’t want the word out there,” she told Central Banking.

The central bank did not just respond to emergencies in individual banks, but reformed standards for the whole sector. In June 2018, it issued a capital requirements directive for the country’s banks. It has the power to increase capital for any lender that it judges is not meeting risk management standards. Addison chairs Ghana’s Financial Stability Council, the body created by President Akufo-Addo in 2019 to co-ordinate the efforts of the country’s regulatory bodies. In September 2019, the Institute of Chartered Accountants (Ghana) fined a number of accounting firms, including Deloitte, for their role in failing to adequately audit some of the country’s banks.

While the standout feature for the Bank of Ghana during the last three years has been reforming the country’s banking sector, its performance in other fields has also impressed some outside observers. Addison’s predecessors faced the problem that the previous Ghanaian government had been resorting to monetary financing. International donors helped to push the government away from this device. Under Addison’s predecessor but one, Henry Kofi Wampah, the Bank of Ghana had hiked policy rates in order to deal with rapidly rising inflation.

Tighter monetary policy, almost certainly reinforced by the reforms of the government’s fiscal approach, meant that the most recent bout of runaway annual inflation peaked in 2016. The Bank of Ghana’s Monetary Policy Committee, which consists of seven members – five from the central bank and two external members appointed by the minister of finance – subsequently has been able to cut policy rates in response, with the IMF describing its stance as appropriate. The inflation rate in Ghana as measured by the consumer price index, stood at 7.9% in December. This was almost at the centre of central bank’s price stability mandate, defined as a medium-term inflation target of 8% with a band of ±2 percentage points. Consumer price index (CPI) inflation has hit highs of close to 19% in 2016.

“Ghana’s macroeconomic outlook remains favourable, supported by strong activity in the extractive industry and a safer banking system. Real GDP growth is projected at around 7% in 2019. September consumer price inflation, at 7.6% in the rebased CPI series, is just below the 8% target,” says Carlo Sdralevich, Western III division chief at the IMF, in the fund’s most recent Article IV review, in October 2019. “The cedi has depreciated by about 10% from the beginning of 2019. The central bank’s international reserves are projected to record a buildup in 2019, supported mainly by an improving trade balance and external borrowing.”

Sdralevich says the Bank of Ghana’s monetary policy stance appears appropriate, “but it should continue to remain vigilant to inflationary risks”, with tightening being a possibility, should “inflationary or exchange rate pressures emerge”: “The central bank’s focus on building external buffers going into 2020 is a welcome development.”

The Bank of Ghana has also done an effective job of managing the country’s physical currency. It successfully introduced two new banknote denominations in November, for 100 and 200 cedis ($17.9 and$35.7 respectively). At the same time, it replaced the 2 cedi banknote with a coin. The new higher-denomination notes were offered as inflation had once again eroded the value of the currency since four ‘zeros’ were removed from the currency in 1997. The new notes also offer enhanced security features aimed at discouraging counterfeiters. They are also expected to last longer and be more easily read by machines.

The central bank’s five-year strategy for improving payments, published in 2019 and building on a previous plan, puts great emphasis on fostering the growth of electronic means of payments and increasing financial inclusion. One key aim is to broaden the type of institutions that can offer payment services. This kind of initiative has brought excellent results in other African countries, where the entry of telecoms companies to the payments market has vastly expanded access to banking services. The central bank wants to make it possible to use QR codes to carry out transactions. It also plans to have a regulatory sandbox in place for fintech companies by the end of 2020. In October 2018, the central bank created a cyber security centre to aid the banking sector in dealing with this evolving risk.

In December 2019, the Bank of Ghana also published a set of principles aimed at encouraging environmentally sustainable and socially responsible practices by the country’s banks. It was one of the first central banks in a developing economy to make such a move. The central bank has also made considerable improvements to its website. This includes a more user-friendly interface and responsive web pages.

The Bank of Ghana still faces challenges on multiple fronts. It must ensure the recapitalisation of some of the banks that were put into resolution. The banking sector also has to digest a large proportion of non-performing loans, and IMF officials have called for closer regulation of the country’s non-bank finance sector. But the performance of the central bank during the past three years indicates the institution is well placed to meet such challenges.

The Bank of Ghana has an impressive record of achievement, but the most notable is its reform of a seriously undercapitalised and poorly managed banking sector. The central bank has dealt with this complex set of risks, which could have caused serious damage to the country’s economy.

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Alice Shen and William Towning

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